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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 13, 2000
REGISTRATION NO. 333-91987
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1
To
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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NET2000 COMMUNICATIONS, INC.
(Exact Name of Registrant as specified in its charter)
2180 FOX MILL ROAD
HERNDON, VIRGINIA 20171
(703) 654-2000
(Address of Principal Executive Offices)
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<S> <C> <C>
DELAWARE 4813 51-0384995
(State or other jurisdiction of (Primary Standard Industrial (IRS Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
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CLAYTON A. THOMAS, JR.
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
NET2000 COMMUNICATIONS, INC.
2180 FOX MILL ROAD
HERNDON, VIRGINIA 20171
(703) 654-2000
(Name, address, including zip code and telephone number,
including area code of agent for service)
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Copies to:
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<S> <C>
NANCY A. SPANGLER, ESQUIRE
PIPER MARBURY RUDNICK & WOLFE LLP KIRK A. DAVENPORT, ESQUIRE
1850 CENTENNIAL PARK DRIVE, SUITE 610 LATHAM & WATKINS
COMMERCE EXECUTIVE PARK III 885 THIRD AVENUE, SUITE 1000
RESTON, VIRGINIA 20191 NEW YORK, NEW YORK 10022
(703) 390-5240 (212) 906-1284
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, as amended (the "Securities Act") check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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<CAPTION>
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TITLE OF EACH CLASS PROPOSED PROPOSED MAXIMUM AMOUNT OF
OF SECURITIES AMOUNT TO BE MAXIMUM OFFERING AGGREGATE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED PRICE PER UNIT PRICE(1) FEE(2)
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<S> <C> <C> <C> <C>
Shares of Common Stock,
par value $.01............ 11,500,000 shares $16.00 $184,000,000 $621
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a) under the Securities Act.
(2) A registration fee of $47,955 was paid at the time of the initial filing of
this registration statement based on the estimated aggregate offering price.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) of
the Securities Act, or until the registration statement shall become effective
on such date as the Commission, acting pursuant to said Section 8(a), may
determine.
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<PAGE> 2
THE INFORMATION CONTAINED IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE
AND MAY BE CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE
REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
IS EFFECTIVE. THE PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL NOR
DOES IT SEEK AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE
THE OFFER OR SALE IS NOT PERMITTED.
Subject to Completion. Dated January 13, 2000.
[NET2OOO COMMUNICATIONS LOGO]
10,000,000 Shares
NET2000 COMMUNICATIONS, INC.
Common Stock
----------------------
This is an initial public offering of shares of common stock of Net2000
Communications, Inc. The initial public offering price is expected to be between
$12.50 and $16.00 per share.
Prior to this offering, there has been no public market for the common
stock. Application has been made for quotation of the common stock on the Nasdaq
National Market under the symbol "NTKK".
SEE "RISK FACTORS" ON PAGE 6 TO READ ABOUT CERTAIN FACTORS YOU SHOULD
CONSIDER BEFORE BUYING SHARES OF THE COMMON STOCK.
----------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
----------------------
<TABLE>
<CAPTION>
Per Share Total
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<S> <C> <C>
Initial public offering price............................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to Net2000....................... $ $
</TABLE>
To the extent that the underwriters sell more than 10,000,000 shares of
common stock, the underwriters have the option to purchase up to an additional
1,500,000 shares from Net2000 at the initial public offering price less the
underwriting discount.
----------------------
The underwriters expect to deliver the shares in New York, New York on
, 2000.
GOLDMAN, SACHS & CO.
DONALDSON, LUFKIN & JENRETTE
J.P. MORGAN & CO.
LEGG MASON WOOD WALKER
INCORPORATED
----------------------
Prospectus dated , 2000.
<PAGE> 3
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding us and our common stock being sold in this offering and
our financial statements and the notes to those statements appearing elsewhere
in this prospectus.
Net2000 Communications is a rapidly-growing, innovative provider of
state-of-the-art broadband telecommunications services. Our strategy is to focus
on high-end customers, primarily large- and medium-sized businesses, having a
minimum of 50 business access lines and spending over $50,000 annually for
Internet, data and voice telecommunications services. As a competitive
telecommunications provider, we offer businesses located throughout the mid-
Atlantic and northeastern regions of the United States cutting-edge, responsive
solutions as an alternative to traditional telephone companies. Today, we offer
an integrated package of high-speed data services, Internet services, local
services and long distance services, primarily delivered from our own network
over a single, high capacity "broadband" connection and conveniently billed on a
single invoice. Since the introduction of our Net2000-branded services in July
1998, we have successfully acquired over 1,100 new business customers,
representing approximately 78,000 access lines. As of December 31, 1999, our
rapidly growing sales force consisted of 152 people.
We intend to offer services in major markets throughout the United States
in three phases over the next 24 months. Our Phase I deployment, consisting of
13 data switches and 5 voice switches in 10 markets in the
telecommunications-rich Boston to Washington, D.C. corridor, is substantially
complete. Our Phase II deployment will establish our national presence with 10
additional data switches and 2 additional voice switches in 10 markets and is
scheduled to be completed in December 2000. Our Phase III deployment, scheduled
to be completed by late 2002, entails adding 4 additional markets and upgrading
all of our existing data switches to Internet protocol-based (IP) switches that
can provide both data and voice services.
We are building our network by initially deploying lower-cost data switches
and leasing fiber optic lines from others. As we experience increases in
customer traffic in a given market, we will consider deploying voice switches
and owning a portion of the fiber optic lines. By deploying this "smart-build"
network strategy, we believe that we will gain capital efficiencies that may
lead to stronger operating results.
After five years of successfully identifying and acquiring business
customers by selling advanced data and voice services as a Bell Atlantic sales
agent, we transitioned out of the agency program and launched our
Net2000-branded services in July 1998. During our tenure as a Bell Atlantic
sales agent, we ranked as its number one sales agent each year based on annual
sales revenue. We believe our early success in selling Net2000-branded services
to our 1,100 current customers is largely attributable to this five-year track
record. In addition, as a sales agent, we established close relationships with
more than 2,200 business customers representing over 150,000 access lines that
we sold, managed the installation of and administered on a daily basis. We
believe these businesses spend more than $200 million annually for
telecommunications services. We believe our close relationships with these
businesses present us with a strategic base of customers to target for
Net2000-branded services. Since we transitioned our business to the provisioning
of our Net2000-branded services, we have incurred significant expense for the
establishment of our brand and the build-out of our network and, as a result,
our net income has decreased. We expect significant losses and negative cash
flow to continue for at least the next several years.
Our objective is to become the provider of choice of integrated business
telecommunications services in our target markets. We believe we are
well-positioned to compete effectively against other traditional telephone
companies and competitive telecommunications providers. The key differentiators
of our business are:
- proven sales and marketing track record;
- strong relationships with over 3,000 businesses;
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- focus on complex, communications-intensive business customers;
- e.mpower, our next generation, web-enabled proprietary customer self-care
system;
- state-of-the-art, readily expandable customer care and back office
systems;
- data-focused, innovative smart-build network;
- experienced and proven management team; and
- strategic business partnership with Nortel Networks Corporation.
We believe these key differentiators will enable us to capitalize on the rapid
growth of the Internet and e-commerce, and the resultant increased demand for
broadband data services.
BUSINESS STRATEGY
The key elements of our business strategy include the following:
ACQUIRE CUSTOMERS BY USING OUR PROVEN SALES AND MARKETING TECHNIQUES
- Utilize our experienced sales staff to expand existing customer
relationships and acquire new customers.
TARGET HIGH-END BUSINESSES
- Focus on businesses that have at least 50 access lines, need multiple
services and spend more than $50,000 a year on telecommunications
services.
USE TECHNOLOGY, INCLUDING WEB-BASED SOLUTIONS, AND STATE-OF-THE-ART BACK
OFFICE SYSTEMS TO DELIVER SUPERIOR CUSTOMER CARE
- Provide customers web-based access to their network billing and
management information via e.mpower; and
- Utilize state-of-the-art, readily expandable information systems to
shorten customer installation time.
CONTINUE BUILD-OUT OF OUR DATA-FOCUSED NETWORK TO MAXIMIZE SPEED TO MARKET AND
MINIMIZE INVESTMENT RISK
- Deploy innovative, smart-build network with limited equipment
collocation. Our smart-build strategy differs from other
telecommunications services providers in several ways because we:
- lead with lower-cost data switches;
- back-fill with voice switches as customer traffic grows;
- enhance margins by utilizing DSL technology; and
- minimize collocation of our network equipment with traditional telephone
companies.
- Continue using flexible network design to support evolving data
technologies; and
- Optimize customer connections and margins by adding additional services
on existing telephone lines.
USE THE EXPERIENCE OF OUR PROVEN MANAGEMENT TEAM
- Our senior management averages 20 years of industry experience; and
- Use our experience with industry leading corporations such as AT&T, Bell
Atlantic, MCIWorldcom, Nortel and Qwest to enhance our customer
relationships.
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CAPITALIZE ON OUR STRATEGIC BUSINESS PARTNERSHIP WITH NORTEL NETWORKS
- Maintain full-time on-site technical and operational support;
- Mitigate technological obsolescence by economically upgrading our network
switches; and
- Take advantage of Nortel's equity position which aligns our mutual
business and technical interests.
RECENT EVENTS
In January 2000, we entered into a letter of intent for the sale of
approximately 285 resale customer accounts representing approximately 10,000
access lines. This sale will facilitate our focus on servicing customers
connected to our network.
THE OFFERING
Shares of common stock offered....... 10,000,000 shares
Shares of common stock outstanding
after this offering................ 34,862,610 shares
Proposed Nasdaq National Market
symbol............................. NTKK
Use of proceeds...................... To expand our sales force and sales
office locations, fund the expansion and
development of our network and
information technology systems, repay
debt and provide for working capital and
other general corporate purposes,
including funding operating losses.
The calculation of the number of shares outstanding after this offering is
based on the number of shares outstanding on December 31, 1999, and does not
reflect shares that may be issued upon the exercise of options and warrants.
Unless otherwise specifically stated, information in this prospectus, including
the foregoing numbers, assumes the underwriters do not exercise their option to
purchase additional shares in the offering. See "Underwriting."
------------------------
PRINCIPAL OFFICES
Our principal executive offices are located at 2180 Fox Mill Road, Herndon,
VA 20171 and our telephone number is 1-800-825-2000. Our website address is
www.net2000.com. Information on our website does not constitute part of this
prospectus.
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA
The following table presents our summary consolidated financial and other
data which should be read together with our consolidated financial statements
and related notes and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" presented elsewhere in this prospectus.
EBITDA consists of net income (loss) excluding net interest, taxes,
depreciation and amortization (including amortization of deferred compensation).
EBITDA is provided because it is a measure of financial performance commonly
used in the telecommunications industry. We have presented EBITDA to enhance
your understanding of our operating results. You should not construe it as an
alternative to operating income as an indicator of our operating performance or
as an alternative to cash flows from operating activities as a measure of
liquidity determined in accordance with GAAP. We may calculate EBITDA
differently than other companies. For further information, see our financial
statements and related notes elsewhere in this prospectus.
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The pro forma net income (loss) per share data summarized below gives
effect to the automatic conversion of all of our preferred stock into common
shares as if the conversion occurred at the beginning of the respective period.
The pro forma balance sheet data gives effect to the automatic conversion of the
preferred stock as of September 30, 1999. The pro forma as adjusted balance
sheet data gives effect to the issuance and sale of 10,000,000 shares of common
stock in this offering, as if these transactions occurred on September 30, 1999.
See "Use of Proceeds."
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<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
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1994 1995 1996 1997 1998 1998 1999
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(UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Operating revenue............ $ 803 $ 1,238 $ 1,939 $ 3,544 $ 9,419 $ 5,918 $ 18,670
Operating income (loss)...... 415 334 85 (1,318) (14,294) (8,306) (25,472)
Other income (expenses)...... (4) (15) (17) 817 527 244 3,439
-------- -------- -------- -------- -------- -------- --------
Net income (loss)............ $ 411 $ 319 $ 68 $ (501) $(13,767) $ (8,062) $(22,033)
Net income (loss) applicable
to common stockholders..... 411 319 68 (501) (22,670) (13,632) (37,811)
Net income (loss) per share
applicable to common
stockholders -- basic and
diluted.................... 0.04 0.03 0.01 (0.05) (2.25) (1.35) (3.74)
Pro forma net income (loss)
per share applicable to
common stockholders --
basic and diluted.......... (0.69) (0.89)
OTHER FINANCIAL DATA:
Capital expenditures......... (3) (27) (34) (88) (2,031) (561) (26,111)
Cash flows provided by (used
in) operating activities... 308 220 1 (476) (11,717) (6,703) (15,451)
Cash flows (used in) provided
by investing activities.... (3) (27) (34) (88) (2,980) (1,510) (26,850)
Cash flows (used in) provided
by financing activities.... (244) (222) 2 2,909 45,788 16,447 22,182
EBITDA....................... 417 329 106 (313) (13,604) (7,969) (19,770)
OPERATING DATA:
Total access line equivalents
billed(1).................. -- -- -- -- 10,554 2,399 41,678
Total customers billed....... 1 1 21 87 567 268 694
Total employees.............. 6 12 18 58 164 149 348
Switches in service:......... -- -- -- -- -- -- 6
Voice...................... -- -- -- -- -- -- 2
Data....................... -- -- -- -- -- -- 4
</TABLE>
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(1) Line equivalents calculated on the basis of 64 kilobits per second per line.
<TABLE>
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SEPTEMBER 30, 1999
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PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
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(UNAUDITED)
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BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 13,320 $13,320 $144,645
Property and equipment, net................................. 49,623 49,623 49,623
Working capital............................................. 3,755 3,755 135,080
Total assets................................................ 74,102 74,102 205,427
Long-term debt.............................................. 18,286 18,286 18,286
Redeemable preferred stock.................................. 75,181 -- --
Common stock................................................ 101 248 348
Total stockholders' (deficit) equity........................ (53,296) 21,885 153,210
</TABLE>
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Net2000, Net2000 Group and the Net2000 logo as displayed on the cover of
this prospectus are our registered service marks. Service mark registration
applications are pending for e.mpower and the phrase "Leading the
Telecommunications Revolution." All other trade names, trademarks and service
marks used in this prospectus are the property of their respective owners.
Except as otherwise indicated, information in this prospectus gives effect
to:
- a five-for-four stock split in the form of a stock dividend of all
outstanding shares of our common stock effected on January 12, 2000; and
- conversion of all outstanding shares of our preferred stock into
14,673,045 shares of our common stock upon the closing of this offering.
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RISK FACTORS
RISKS RELATED TO OUR BUSINESS
A SIGNIFICANT AMOUNT OF OUR BUSINESS COMES FROM A CONCENTRATED GROUP OF
CUSTOMERS AND ANY DECREASE IN REVENUE FROM THESE CUSTOMERS COULD ULTIMATELY
DECREASE OUR INCOME.
A significant portion of our revenue as a competitive telecommunications
provider has been generated from a limited number of customers. In the three
months ended December 31, 1999, our top 10 customers, approximately 1% of our
customer base, accounted for approximately 19% of our revenue, and we expect
that these customers will continue to account for a significant portion of our
revenue in the future. The loss of a number of these key customers could
significantly decrease our revenue, which would seriously harm our operating
results.
OUR COSTS COULD RISE IF WE ARE UNABLE TO LEASE FIBER OPTIC LINES FROM
OTHERS, WHICH MAY NOT BE AVAILABLE ON ATTRACTIVE TERMS OR AT ALL.
We initially seek to lease fiber optic lines from other telecommunications
services providers to interconnect our switches and have access to our customers
and the networks of other providers. We cannot assure you that these service
providers will continue to lease fiber optic lines to us on economically
attractive terms and on a timely basis. If we fail to obtain needed leased fiber
optic lines on satisfactory terms, our ability to reach certain market areas
could be delayed or we may need to make additional unexpected up-front capital
expenditures to install our own fiber optic lines. In addition, any extended
interruption in a telecommunications services provider's network from which we
lease fiber optic lines could disrupt our operations and have a material adverse
effect on us.
RESISTANCE BY CUSTOMERS TO ENTER INTO NEW SERVICE ARRANGEMENTS WITH US MAY
REDUCE OUR INCOME.
The success of our service offerings will be dependent upon, among other
things, the willingness of additional customers to accept us as a new provider
of broadband telecommunications services. We cannot assure you that we will be
successful in overcoming the resistance of potential customers to change their
service provider, particularly those that purchase services from the traditional
telephone companies, or that customers will buy our services. The lack of
customer acceptance would have a material adverse effect on us.
OUR LIMITED OPERATING HISTORY PROVIDING TELECOMMUNICATIONS SERVICES MAKES
EVALUATING OUR PERFORMANCE DIFFICULT.
We began operating as a competitive telecommunications provider in July
1998. Prior to that, we were a sales agent for Bell Atlantic, a business from
which we transitioned in June 1998. As a result of our limited operating history
as a competitive telecommunications provider, you have limited operating and
financial data with which to evaluate our past performance and determine how we
will perform in the future. We cannot assure you that we will be able to
successfully operate our new business.
WE HAVE A HISTORY OF OPERATING LOSSES, AND WE MAY NOT BE PROFITABLE IN THE
FUTURE.
We have incurred significant losses since we began operations as a
competitive telecommunications provider and expect to continue to incur losses
in the future as we build our
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network. As of September 30, 1999, we had an accumulated deficit of $61.6
million. We expect to experience losses during our network and service
deployment which will continue for the foreseeable future. Prolonged effects of
generating losses without additional funding may restrict our ability to pursue
our business strategy. Unless our business plan is successful, your investment
in our common stock may result in a complete loss of your invested capital.
If we cannot achieve profitability from operating activities, we may not be
able to meet:
- our capital expenditure requirements;
- our debt service obligations; or
- our working capital needs.
OUR FAILURE TO PROPERLY MANAGE GROWTH COULD ADVERSELY AFFECT THE CONTINUED
IMPLEMENTATION AND EXPANSION OF OUR SERVICE OFFERINGS.
If we successfully implement our business plan, we will rapidly expand our
operations. We cannot assure you that we will successfully implement the
necessary operational and financial systems or that we will successfully
maintain the systems necessary to manage a competitive business in an evolving
industry. Any failure to implement and improve these systems at a pace
consistent with the growth of our business and industry changes could cause
customers to switch service providers which would have a material adverse effect
on us.
We expect to expand our business plan to include additional switches,
markets and telecommunications services. We cannot assure you that we can:
- implement these additional switches or that such implementation will be
technically or economically feasible;
- successfully develop or market additional products and services; or
- operate and maintain our new networks and telecommunications services
profitably.
IF WE ARE UNABLE TO ATTRACT AND RETAIN KEY MANAGEMENT AND PERSONNEL, WE MAY
NOT BE ABLE TO IMPLEMENT OUR BUSINESS PLAN.
We believe that our future success will be due, in part, to our experienced
management team, including Messrs. Thomas, Heintzelman, Mendes and Clarke.
Losing the services of one or more members of our management team could
adversely affect our business and our expansion efforts and possibly prevent us
from:
- further deploying and improving our operational, financial and
information systems and controls;
- hiring and retaining qualified sales, marketing, administrative,
operating and technical personnel; and
- training and managing new personnel.
In addition, competition for qualified employees has intensified in recent
years, especially in the Northern Virginia region where we are headquartered,
and may become even more intense in the future. Our ability to implement our
business plan is dependent on our ability to hire and
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retain a large number of new employees each year. If we are unable to hire
sufficient qualified personnel, our ability to increase revenue could be
impaired, and customers could experience delays in installation of service or
experience lower levels of customer care.
WE MAY NOT BE ABLE TO OBTAIN ADDITIONAL FUNDS, WHICH COULD PREVENT US FROM
IMPLEMENTING OUR BUSINESS PLAN.
We need additional financing for future capital expenditures and other
purposes, including:
- construction of our network and our automated back office systems;
- offering new broadband telecommunications services;
- acquisitions;
- paying scheduled principal and interest payments on our bank and Nortel
debt; and
- financing operating losses.
There can be no assurance that any additional financing we may need will be
available to us on favorable terms or at all.
WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY AGAINST OTHER COMPETITORS THAT
HAVE SIGNIFICANTLY GREATER RESOURCES THAN WE DO WHICH COULD CAUSE US TO
LOSE CUSTOMERS.
The telecommunications industry is highly competitive and is affected by
the introduction of new services by, and the market activities of, major
industry participants. Several of our competitors are substantially larger and
have greater financial, technical and marketing resources than we do. We have
not achieved, and do not expect to achieve, a significant market share for any
of the broadband telecommunications services we offer in our target markets. In
particular, larger competitors have certain advantages over us, including:
- long-standing relationships and brand recognition with customers;
- financial, technical, marketing, personnel and other resources
substantially greater than ours;
- more funds to deploy telecommunications services;
- potential to lower prices of competitive telecommunications services; and
- fully-deployed networks.
We face competition from other current and potential market entrants,
including:
- domestic and international long distance providers seeking to enter,
re-enter or expand entry into the local telecommunications marketplace;
and
- other domestic and international competitive telecommunications
providers, resellers, cable television companies and electric utilities.
A continuing trend toward combinations and strategic alliances in the
telecommunications industry could give rise to significant new competitors.
THE CONDUCT OF THE TRADITIONAL TELEPHONE COMPANIES, INCLUDING BELL
ATLANTIC, COULD CAUSE US TO LOSE CUSTOMERS.
Currently, we depend on our interconnection agreements with Bell Atlantic
and GTE, and in the future, we will need to execute similar agreements with the
other traditional telephone companies operating in our target markets.
Interconnection agreements are agreements between local telecommunications
services providers that set forth the terms and conditions governing
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<PAGE> 11
how those providers will interconnect their networks and/or purchase or lease
certain network facilities and services. Our interconnection agreements with
Bell Atlantic and GTE provide that our connection and maintenance orders will
receive the same attention as Bell Atlantic's and GTE's end-user customers and
that Bell Atlantic and GTE will provide capacity at key telecommunications
intersections to keep call blockage within industry standards. Accordingly, we
are and will continue to be dependent on Bell Atlantic and GTE and, as we expand
our network, we will be dependent on other traditional telephone companies, to
assure uninterrupted service and competitive services. Blocked calls result in
customer dissatisfaction and risk the loss of business. Interconnection
agreements, such as our agreements with Bell Atlantic and GTE, typically have
short terms, requiring us to renegotiate frequently. Some of our agreements with
Bell Atlantic have one year or less remaining before we will have to renegotiate
them. If the terms of any interconnection agreements are not favorable to us, it
could have a material adverse effect on our business.
Traditional telephone companies may not provide timely installation of
business access lines or adequate service quality, thereby impairing our
reputation with customers who can choose to switch back to the traditional
telephone company. In addition, the prices set forth in our interconnection
agreements may be subject to significant rate increases at the discretion of the
regulatory authority in each state in which we operate. Part of our
profitability depends on these state-regulated rate structures. We cannot assure
you that the rates charged to us under the interconnection agreements will allow
us to offer low enough usage rates to attract a sufficient number of customers
and to operate our business profitably.
THE TELECOMMUNICATIONS INDUSTRY IS UNDERGOING RAPID TECHNOLOGICAL CHANGES,
AND OUR FAILURE TO KEEP UP WITH SUCH CHANGES COULD CAUSE US TO LOSE
CUSTOMERS.
The telecommunications industry is subject to rapid and significant changes
in technology, customer requirements and preferences. New technologies could
reduce the competitiveness of our network. We may be required to select one
technology over another, but at a time when it would be impossible to predict
with any certainty which technology will prove to be the most economic,
efficient or capable of attracting customer usage. Subsequent technological
developments may reduce the competitiveness of our network and require
unbudgeted upgrades or additional products that could be expensive and time
consuming. If we fail to adapt successfully to technological changes or
obsolescence or fail to obtain access to important technologies, our business
could be materially and adversely affected.
A SYSTEM FAILURE COULD CAUSE DELAYS OR INTERRUPTIONS OF SERVICE WHICH COULD
CAUSE US TO LOSE CUSTOMERS.
Our success will require that our network provides competitive reliability,
capacity and security. Some of the risks to our network and infrastructure
include:
- physical damage to business access lines;
- power surges or outages;
- capacity limitations;
- software defects;
- lack of redundancy; and
- disruptions beyond our control.
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Such disruptions may cause interruptions in service or reduced capacity for
customers, any of which could have a material adverse effect on us.
IF OUR BACK OFFICE AND CUSTOMER CARE SYSTEMS ARE UNABLE TO MEET THE NEEDS
OF OUR CUSTOMERS, WE MAY LOSE CUSTOMERS.
Sophisticated back office processes and information management systems are
vital to our growth and our ability to achieve operating efficiencies. We are
dependent on Saville for our billing system, Metasolv for our provisioning
systems, and Siebel for our customer support system. We cannot assure you that
these systems will perform as expected as we grow our customer base. The
following could have a material adverse effect on our operations:
- failure of third-party vendors to deliver products and services in a
timely manner at acceptable costs;
- our failure to identify key information and processing needs;
- our failure to integrate products or services effectively;
- our failure to upgrade systems as necessary; or
- our failure to attract and retain qualified systems support personnel.
ALL YEAR 2000 PROBLEMS MAY NOT HAVE BEEN ADDRESSED BY OUR SUPPLIERS AND ANY
SERVICE INTERRUPTION WE EXPERIENCE AS A RESULT OF THESE PROBLEMS MAY CAUSE
US TO LOSE CUSTOMERS.
The Year 2000 issue generally describes the various problems that may
result from the improper processing of dates and date-sensitive transactions by
computers and other equipment as a result of computer hardware and software
using two digits, rather than four digits, to identify the year in a date. Any
computer programs or systems of our suppliers that have date-sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000.
While we have experienced no Year 2000 issue to date, and we are not aware of
any material issues for our suppliers, we are continuing to evaluate and
determine whether our significant suppliers are in compliance or have
appropriate plans to remedy Year 2000 issues when their systems interact with
our systems. We do not expect that this will have a material impact on our
operations. However, there can be no assurance that the systems of other
companies on which we rely are Year 2000 compliant, that another company's
failure to successfully convert, or that another company's conversion to a
system incompatible with our systems, would not have an impact on our
operations. The failure of our principal suppliers to be Year 2000 compliant
could result in delays in service deliveries from those suppliers and materially
impact our ability to do business.
RISKS RELATED TO OUR INDUSTRY
DEREGULATION OF THE TELECOMMUNICATIONS INDUSTRY INVOLVES UNCERTAINTIES, AND
THE RESOLUTION OF THESE UNCERTAINTIES COULD ADVERSELY AFFECT OUR BUSINESS
BY FACILITATING GREATER COMPETITION AGAINST US, REDUCING POTENTIAL REVENUES
OR RAISING OUR COSTS.
The Telecommunications Act of 1996, or Telecommunications Act, provides for
significant deregulation of the telecommunications industry, including the local
telecommunications and long distance industries. This federal statute and the
related regulations remain subject to judicial review and additional rulemakings
of the Federal Communications Commission, or FCC, making it difficult to predict
what effect the legislation will have on us, our operations and our competitors.
10
<PAGE> 13
Several regulatory and judicial proceedings have recently concluded, are
underway, or may soon be commenced, that address issues affecting our operations
and those of our competitors, which may cause significant changes to our
industry. We cannot predict the outcome of these developments, nor can we assure
you that these changes will not have a material adverse effect on us. For a more
thorough discussion of the regulatory issues that may impact our business, see
"Government Regulation." The following is a non-exhaustive list of proceedings
and regulatory developments that could have a material impact on our business
operations:
REGIONAL BELL OPERATING COMPANY PROVISION OF TRADITIONAL LONG DISTANCE
SERVICES. On December 22, 1999, the FCC approved an application filed by
Bell Atlantic seeking authority to begin providing traditional long
distance services to customers located in the State of New York. The
Telecommunications Act provides relief from the current restriction on
regional Bell operating company provision of long distance service so long
as certain procompetitive criteria are met. This approval is likely to
strengthen Bell Atlantic's competitive position in New York substantially,
which could have a materially adverse effect on our continued ability to
attract and retain customers. We anticipate that Bell Atlantic will soon
submit similar applications to obtain traditional long distance service
authority in other states in its 14-state operating region. In addition, on
January 10, 1999, Southwestern Bell filed an application with the FCC
seeking permission to begin providing traditional long distance services to
customers in Texas, and we expect other regional Bell operating companies
to file applications soon. The widespread entry of regional Bell operating
companies into the long distance business could result in substantial new
competition with our services and may have a material adverse effect on our
business.
DEREGULATION OF TRADITIONAL TELEPHONE COMPANY ADVANCED DATA
SERVICES. A proceeding has recently been initiated at the FCC to
determine, among other things, whether traditional telephone companies will
be able to avoid some of their obligations under the Telecommunications Act
by providing long distance data services through separate affiliates, as
well as be relieved of certain pricing restrictions. A decision adverse to
competitive telecommunications providers could provide the traditional
telephone companies with a significant competitive advantage in the
provision of data services in these areas.
REGULATION OF ACCESS CHARGES. The FCC has asked for public comment on
whether it should begin to regulate the access charges imposed by
competitive telecommunications providers. A decision by the FCC to regulate
access charges assessed by competitive telecommunications providers like us
could result in a significant reduction in the amount we can charge long
distance carriers that use our network to originate and terminate calls to
and from our customers.
PRICING FLEXIBILITY FOR HIGH CAPACITY SERVICES. In August 1999, the
FCC released an order that granted substantial additional pricing
flexibility to traditional telephone companies for interstate special and
switched access services including the removal of some services from price
cap regulation. The order created an additional opportunity for traditional
telephone companies to achieve greater flexibility in the pricing of all
interstate access services once they satisfy certain competitive criteria.
This pricing flexibility will likely result in traditional telephone
companies lowering their prices in high traffic density areas and placing
greater downward pressure on our prices and potentially lowering our
margins.
NEGOTIATION OF INTERCONNECTION AGREEMENTS. While we have
interconnection agreements with traditional telephone companies for all
markets in which we currently operate, these agreements will expire, and
additional agreements will be needed to enter new markets, within the next
six to 18 months. Our ability to obtain new interconnection agreements on
favorable terms and conditions will be dependent on regulatory developments
and these developments could adversely affect our interests.
11
<PAGE> 14
RISKS RELATED TO THIS OFFERING
OUR MANAGEMENT HAS BROAD DISCRETION OVER THE USE OF PROCEEDS FROM THIS
OFFERING, WHICH COULD ADVERSELY AFFECT OUR BUSINESS.
We intend to use the proceeds of the offering to expand our sales force and
sales office locations, fund the expansion and development of our network and
information technology systems, repay debt and provide for working capital and
other general corporate purposes. We cannot predict in which, if any, of our
existing or future opportunities we will ultimately invest. While we currently
expect to use the proceeds of the offering as described above, if our plans
change, we would use any remaining cash to fund other development projects or
acquisitions and for general corporate and working capital purposes.
OUR EXECUTIVE OFFICERS AND DIRECTORS ARE ABLE TO EXERCISE SIGNIFICANT
INFLUENCE OVER OUR COMPANY, WHICH COULD ADVERSELY AFFECT OUR BUSINESS AND
DEPRESS OUR STOCK PRICE.
After this offering, our executive officers and directors will continue to
control approximately 42.8% of our common stock and will exercise significant
influence over stockholder voting matters which will limit the influence of our
new stockholders. If our officers and directors act together, they will be able
to influence the composition of the board of directors and will continue to have
significant influence over our affairs in general.
OUR STOCK DOES NOT HAVE A TRADING HISTORY AND MAY BE EXTREMELY VOLATILE
BECAUSE WE OPERATE IN A RAPIDLY CHANGING INDUSTRY.
The trading price of our common stock is likely to be volatile. The stock
market has experienced extreme volatility and this volatility has often been
unrelated to the operating performance of particular companies. We cannot be
sure that an active public market for our common stock will develop or continue
after this offering. Investors may not be able to sell their common stock at or
above our initial public offering price or at all. Prices for the common stock
will be determined in the marketplace and may be influenced by many factors,
including variations in our financial results, changes in earnings estimates by
industry research analysts, investors' perceptions of us and general economic,
industry and market conditions.
FUTURE SALES OF OUR COMMON STOCK MAY LOWER OUR STOCK PRICE.
If our existing stockholders sell a large number of shares of our common
stock, the market price of the common stock could decline significantly. The
perception in the public market that our existing stockholders might sell shares
of common stock could depress our market price. Immediately after this offering,
approximately 34,862,610 shares of our common stock will be outstanding. Of
these shares, 10,000,000 of the shares included in this offering will be
available for immediate resale in the public market. The remaining 24,862,610
shares, or 71% of our total outstanding shares, will become available for resale
in the public market as shown on the chart below. Of these remaining shares,
24,774,252 shares are subject to lock-up agreements restricting the sale of such
shares for 180 days from the date of this prospectus. However, the
12
<PAGE> 15
underwriters may waive this restriction and allow these stockholders to sell
their shares at any time.
<TABLE>
<CAPTION>
NUMBER OF SHARES DATE OF FIRST AVAILABILITY FOR RESALE
---------------- -------------------------------------
<S> <C> <C>
45,000 Immediately after the date of this prospectus
43,358 90 days after the date of this prospectus
24,774,252 After 180 days from the date of the prospectus subject, in
some cases, to volume limitations
</TABLE>
INVESTORS WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION OF $9.85 IN
THE BOOK VALUE OF THEIR INVESTMENT.
If you purchase shares of our common stock in this offering, you will
experience immediate dilution of $9.85 per share because the price that you pay
will be substantially greater than the net tangible book value per share of the
shares you acquire. This dilution is due in large part to the fact that our
earlier investors paid substantially less than the public offering price when
they purchased their shares. You will experience additional dilution upon the
exercise of stock options and warrants to purchase common stock.
FORWARD-LOOKING STATEMENTS ARE INHERENTLY UNCERTAIN.
We make forward-looking statements in the "Prospectus Summary", "Risk
Factors", "Use of Proceeds", "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business" sections and elsewhere in
this prospectus. These forward-looking statements include, but are not limited
to, statements about our plans, objectives, expectations, intentions and
assumptions and other statements that are not historical facts. We generally
intend the words "expect," "anticipate," "intend," "plan," "believe," "seek,"
"estimate" and similar expressions to identify forward-looking statements.
Because these forward-looking statements involve risks and uncertainties,
including those described in this "Risk Factors" section, our actual results may
differ materially from those expressed or implied by these forward-looking
statements.
13
<PAGE> 16
USE OF PROCEEDS
The net proceeds from the offering, after deducting estimated fees and
expenses, are estimated to be approximately $131.3 million. We intend to use the
net proceeds of the offering together with the approximately $30.0 million cash
balance remaining from the January 7, 2000 draw on our Nortel senior discount
note as follows:
- $20.0 million to expand our sales force and sales office locations;
- $80.0 million to fund the expansion and development of our national
network infrastructure and information technology systems;
- $42.0 million to repay the outstanding balance on the Nortel senior
discount note; and
- $19.3 million to cover other general corporate expenses, including the
funding of operating losses.
As part of our strategy, we may make acquisitions and a portion of the net
proceeds from the offering may be used for such purposes. We have no definitive
agreement with respect to any acquisition, although we regularly engage in
discussions with other companies and assess opportunities on an ongoing basis.
We may be required to obtain additional financing to complete our network
build-out if, among other reasons, we use a portion of the proceeds from the
offering to fund acquisitions, or if our plans or projections change or prove to
be inaccurate. We cannot assure you that this additional financing will be
available on terms acceptable to us or at all.
DIVIDEND POLICY
We have never paid cash dividends on our common stock nor do we have plans
to do so in the foreseeable future. The declaration and payment of any dividends
in the future will be determined by our Board of Directors, in its discretion,
and will depend on a number of factors, including our earnings, capital
requirements and overall financial condition. In addition, our ability to
declare and pay dividends is substantially restricted under our credit facility
with Nortel.
14
<PAGE> 17
CAPITALIZATION
The following table sets forth our consolidated capitalization as of
September 30, 1999, adjusted to reflect our recapitalization as described below,
our pro forma capitalization which gives effect to the automatic conversion of
our redeemable convertible preferred stock into common stock and our pro forma
capitalization as adjusted to reflect the issuance and sale of 10,000,000 shares
of common stock in this offering and the application of the resulting net
proceeds. See "Use of Proceeds." You should read this table together with
"Selected Consolidated Financial and Other Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the historical
financial statements and notes thereto included elsewhere in this prospectus.
<TABLE>
<CAPTION>
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------ --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Lease obligations, long-term portion....................... $ 1,730 $ 1,730 $ 1,730
-------- -------- --------
Notes payable, long-term portion........................... 16,556 16,556 16,556
Redeemable convertible preferred stock (non-cumulative),
par value $0.01 per share; 12,000,000 shares authorized:
11,738,437 shares issued and outstanding, actual; no
shares issued and outstanding, pro forma and pro forma as
adjusted................................................. 75,181 -- --
Stockholders' (deficit) equity:
Preferred stock, par value $0.01 per share; no shares
authorized, issued or outstanding, actual; 60,000,000
shares authorized and no shares issued and
outstanding, pro forma and pro forma as adjusted......
Common stock, par value $0.01 per share; 200,000,000
shares authorized, 10,115,321 shares issued and
outstanding, actual; 24,788,366 shares issued and
outstanding, pro forma and 34,788,366 shares issued
and outstanding pro forma as adjusted................. 101 248 348
Additional paid-in capital............................... 10,508 85,542 216,767
Deferred stock compensation.............................. (2,236) (2,236) (2,236)
Accumulated deficit...................................... (61,669) (61,669) (61,669)
-------- -------- --------
Total stockholders' (deficit) equity............. (53,296) 21,885 153,210
-------- -------- --------
Total capitalization............................. $ 40,171 $ 40,171 $171,496
======== ======== ========
</TABLE>
15
<PAGE> 18
DILUTION
At September 30, 1999, we had a pro forma net tangible book value of
approximately $0.88 per share of common stock. Pro forma net tangible book value
per share of common stock at any date represents the amount of our total
tangible assets minus total liabilities divided by the total number of our
outstanding shares of common stock after giving effect to the automatic
conversion of all outstanding shares of redeemable convertible preferred stock
into 14,673,045 shares of common stock. After giving effect to the sale of the
10,000,000 shares of common stock offered by this prospectus at an assumed
initial public offering price of $14.25 per share (the midpoint of the range
shown on the cover page of this prospectus) and the application of the estimated
net proceeds as described in "Use of Proceeds," our pro forma as adjusted net
tangible book value would have been approximately $153,210,000, or $4.40 per
share. Thus, under these assumptions, purchasers of our common stock offered by
this prospectus will pay $14.25 per share and will receive 10,000,000 shares
with a net tangible book value per share of common stock of $4.40, which
represents an immediate dilution of $9.85 per share.
<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $14.25
------
Pro forma net tangible book value per share as of
September 30, 1999............................... $0.88
Pro forma increase per share attributable to new
investors........................................ 3.52
-----
Pro forma as adjusted pro forma net tangible book value
per share after the offering.......................... 4.40
------
Pro forma dilution per share to new investors.......... $ 9.85
======
</TABLE>
The following table summarizes, on a pro forma as adjusted basis as of
September 30, 1999, the difference between the existing stockholders and new
investors with respect to the number of shares of common stock purchased from
us, the total consideration paid and the average price per share paid at the
initial public offering price of $14.25 per share (before deducting estimated
underwriting discounts and commissions and offering expenses payable by us):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------ ------- ------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders...... 24,788,366 71.3% $ 50,580,818 26.2% $ 2.04
---------- ----- ------------ -----
New investors.............. 10,000,000 28.7% 142,500,000 73.8% 14.25
---------- ----- ------------ -----
Total............ 34,788,366 100.0% $193,080,818 100.0% $ 5.55
========== ===== ============ =====
</TABLE>
The foregoing table assumes no exercise of stock options or warrants. As of
December 31, 1999, there were options and warrants outstanding to purchase
5,417,910 shares of common stock at a weighted average exercise price of $2.02
per share. To the extent outstanding options and warrants are exercised, there
will be further dilution to new investors.
16
<PAGE> 19
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following tables set forth certain historical consolidated financial
and other data of the Company for each of the five years in the period ended
December 31, 1998 and as of and for each of the nine month periods ended
September 30, 1998 and September 30, 1999. We derived our selected historical
consolidated financial data as of and for each of the three years in the period
ended December 31, 1998 and as of and for the nine month period ended September
30, 1999 from our audited consolidated financial statements included elsewhere
in this prospectus. We derived our selected historical consolidated financial
data as of and for the year ended December 31, 1995 from our audited
consolidated financial statements that are not included in this prospectus. We
derived our selected historical consolidated financial data as of and for the
year ended December 31, 1994 and for the nine month period ended September 30,
1998 from our unaudited consolidated financial statements which, in the opinion
of our management, reflect all adjustments, consisting only of normal recurring
accruals, necessary to present fairly the data presented for such periods.
Our operating results for the nine month periods ended September 30, 1998
and September 30, 1999 are not necessarily indicative of results that may be
expected for a full year. You should read the following historical consolidated
financial data in conjunction with "Capitalization," "Summary Consolidated
Financial and Other Data," "Use of Proceeds," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the financial
statements and related notes that we include elsewhere in this prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------- -------------------
1994 1995 1996 1997 1998 1998 1999
---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue.............................. $ 803 $1,238 $1,939 $ 3,544 $ 9,419 $ 5,918 $ 18,670
Operating costs and expenses:
Operating costs...................... 96 150 514 907 7,888 3,855 15,497
Selling, general and
administration..................... 290 749 1,313 3,833 15,075 9,983 26,288
Non-cash compensation expense........ -- -- -- -- 63 49 232
Depreciation and amortization........ 2 5 27 122 687 337 2,125
----- ------ ------ ------- -------- -------- --------
Total operating expenses............. 388 904 1,854 4,862 23,713 14,224 44,142
Operating income (loss).............. 415 334 85 (1,318) (14,294) (8,306) (25,472)
Other income (expenses).............. (4) (15) (17) 817 527 244 3,439
----- ------ ------ ------- -------- -------- --------
Net income (loss).................... $ 411 $ 319 $ 68 $ (501) $(13,767) $ (8,062) $(22,033)
Net income (loss) applicable to
common stockholders................ 411 319 68 (501) (22,670) (13,632) (37,811)
Net income (loss) per share
applicable to common
stockholders -- basic and
diluted............................ 0.04 0.03 0.01 (0.05) (2.25) (1.35) (3.74)
Pro forma net income (loss) per share
Applicable to common
stockholders -- Basic and
diluted(1)......................... (0.69) (0.89)
</TABLE>
17
<PAGE> 20
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------- -------------------
1994 1995 1996 1997 1998 1998 1999
---- ---- ---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
Capital expenditures................... $ (3) $ (27) $ (34) $ (88) $ (2,031) $ (561) $(26,111)
Cash flows provided by (used in)
operating activities................. 308 220 1 (476) (11,717) (6,703) (15,451)
Cash flows (used in) provided by
investing activities................. (3) (27) (34) (88) (2,980) (1,510) (26,850)
Cash flows (used in) provided by
financing activities................. (244) (222) 2 2,909 45,788 16,447 22,182
EBITDA(2).............................. 417 329 106 (313) (13,604) (7,969) (19,770)
OPERATING DATA:
Total access lines equivalents
billed (3)........................... -- -- -- -- 10,554 2,399 41,678
Total customers billed................. 1 1 21 87 567 268 694
Total employees........................ 6 12 18 58 164 149 348
Switches in service.................... -- -- -- -- -- -- 6
Voice................................ -- -- -- -- -- -- 2
Data................................. -- -- -- -- -- -- 4
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
DECEMBER 31, ----------------------------------------
-------------------------------------- PRO FORMA
1994 1995 1996 1997 1998 ACTUAL PRO FORMA(1) AS ADJUSTED(1)
---- ---- ---- ---- ---- ------ ------------ --------------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents........ $ 61 $ 33 $ 3 $ 2,348 $33,440 $ 13,320 $13,320 $144,645
Property and
equipment, net..... 6 49 147 510 11,529 49,623 49,623 49,623
Working capital...... 68 136 167 2,083 30,562 3,755 3,755 135,080
Total assets......... 177 380 603 4,040 50,091 74,102 74,102 205,427
Long-term debt....... -- 16 63 258 2,000 18,286 18,286 18,286
Redeemable preferred
stock.............. -- -- -- 3,500 59,403 75,181 -- --
Common stock......... 100 100 100 100 101 101 248 348
Total stockholders'
(deficit) equity... 77 191 259 (1,087) (23,620) (53,296) 21,885 153,210
</TABLE>
- ---------------
(1) The pro forma net income (loss) per share data summarized below gives effect
to the automatic conversion of all of our preferred stock into common shares
as if the conversion occurred at the beginning of the respective period. The
pro forma balance sheet data gives effect to the automatic conversion of the
preferred stock as of September 30, 1999. The pro forma adjusted balance
sheet data gives effect to the issuance and sale of 10,000,000 shares of
common stock in this offering as if these transactions occurred on September
30, 1999.
(2) EBITDA consists of net income (loss) excluding net interest, taxes,
depreciation and amortization (including amortization of deferred
compensation). EBITDA is provided because it is a measure of financial
performance commonly used in the telecommunications industry. We have
presented EBITDA to enhance your understanding of our operating results. You
should not construe it as an alternative to operating income as an indicator
of our operating performance or as an alternative to cash flows from
operation activities as a measure of liquidity determined in accordance with
GAAP. We may calculate EBITDA differently than other companies. For further
information, see our financial statements and related notes elsewhere in
this prospectus.
(3) Line equivalents calculated on the basis of 64 kilobits per second per line
equivalent to one traditional telephone line.
18
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with the "Selected
Consolidated Financial and Other Data" and the financial statements and notes
thereto contained elsewhere in this prospectus. Financial information contained
herein relating to periods prior to June 30, 1998 primarily reflects our
operations as a sales agent for Bell Atlantic. Because of our transition to a
competitive telecommunications provider and our deployment of facilities, the
financial information relating to periods prior to June 30, 1998 does not
reflect our current and planned business. Comparisons of financial information
between such periods will not provide valid comparisons.
OVERVIEW
We began operations in 1993 as a sales agent selling Bell Atlantic local
services to businesses. Under this program, we received a one-time commission
for selling complex and high-capacity telecommunications services. We were the
largest producing sales agent based on the annual sales revenue which we
generated out of more than 100 sales agents during our last four full years in
the sales agent program, 1994 through 1997.
We initially used the resale of telecommunications services as a market
entry strategy while we began the build-out of our network. In January 1998, we
began offering long distance and non-local data services on a resale basis. In
June 1998, we left the Bell Atlantic sales agent program and began offering
Net2000-branded local telecommunications services on a resale basis directly to
large- and medium-sized businesses. We ceased acquiring new resale customers in
markets where we deployed our own network. In March 1999, we deployed our first
switch and began offering facilities-based telecommunications services. Also in
March 1999, we ceased reselling Bell Atlantic local services in all markets
except New York City and Long Island, where we ceased reselling in November
1999. We no longer use local resale as a primary customer acquisition strategy,
do not intend to do so in the future and plan to migrate as many of our existing
resale customers as possible to our network. In limited circumstances, we use
resale to satisfy customer needs for data and long distance services outside our
network area.
As of December 31, 1999, we have deployed a total of nine switches in our
network, including three voice switches and six data switches throughout the
mid-Atlantic and northeastern regions of the United States under Phase I of our
network deployment schedule. When we complete Phase II in December 2000, we are
scheduled to have deployed a total of seven voice and 23 data switches in major
markets throughout the United States, thereby completing our national data
backbone network. Phase III includes the deployment of four additional data
switches and ten additional voice switches. We expect to complete Phase III by
September 30, 2002.
We estimate that, as of December 31, 1999, our average customer had
approximately 68 access line equivalents. We count one access line equivalent as
64 kilobits of bandwidth, known as a DS-0 circuit, which equates to
approximately one traditional telephone line. Approximately 52% of our customers
purchase more than one service from us.
We expect to continue to derive revenue from the sale of integrated
telecommunications services, including:
- data communications services, including wide area network
interconnection, high speed Internet access, the ability to accommodate
data in the form of packets, or frame relay and private line services;
- voice services, including local and long distance services; and
- enhanced Internet services.
19
<PAGE> 22
We believe that providing telecommunications services over our own
smart-build network will enable us to:
- improve operating margins;
- broaden service offerings and enhance customer control by providing more
efficient service;
- reduce network capital requirements;
- improve speed to market and mitigate the risk associated with investing
capital in long term assets, thereby preserving capital for other uses
such as sales and marketing; and
- reduce operating expenses.
Although we believe our smart-build strategy will improve our results of
operations over the long-term, this strategy is expected to have a negative
effect on our financial condition and results of operations over the short-term.
We expect significant losses and negative cash flow for at least the next
several years, which we expect will be primarily attributable to the deployment
of our national network and expected expansion of our operations.
REVENUE
We generate most of our revenue from the sale of local, long distance,
Internet access and other data services to large- and medium-sized businesses.
We are currently offering our full suite of services in markets where we have
deployed our network. Outside of these markets, we offer data and long distance
services on a resale basis to meet the needs of our large customers.
Our revenue consists of monthly recurring charges, usage charges and
initial, non-recurring charges. Monthly recurring charges include the fees paid
by our customers for lines in service, additional features on those lines and
collocation space. Usage charges consist of fees paid for each call made
generally measured by the minute but also measured by the call. Non-recurring
revenue is typically derived from fees charged to install new customer lines.
In addition to revenue generated from end-user customers, we also generate
revenue from access fees charged to long distance companies for the local
origination and termination of long distance calls from or to our customers. If
an imbalance occurs based on inbound versus outbound local calls, we may also be
owed reciprocal compensation from the traditional telephone company. We will
bill the access and reciprocal compensation to the long distance companies and
local telephone companies on a monthly basis. Reciprocal compensation and access
charges are not significant components of our revenue and represented less than
5% of total revenue for the nine months ended September 30, 1999. Although we
expect revenue from reciprocal compensation and access charges to increase as
more customers come onto our network, we anticipate deriving the majority of our
revenue from the sale of our telecommunications services to large- and
medium-sized businesses.
Prior to July 1998, our revenue primarily consisted of commissions earned
as a Bell Atlantic sales agent, and of telecommunications revenue earned from
the sale of long distance and data services under our own brand name. Since we
began providing Net2000-branded telecommunications services on a resale basis as
a market entry strategy and because we only provisioned our first customer on
our network in May 1999, the majority of our revenue for the nine months ended
September 30, 1999 was derived from the resale of telecommunications services.
However, because we no longer use resale as a primary customer acquisition
strategy, we expect this revenue to quickly diminish in the future as a
percentage of revenue. We expect to transition customers which generate
approximately 70% of our existing resale revenues to our
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network within the next 12 months. As a result of these transition periods,
revenue comparisons to prior periods may not be valid comparisons.
OPERATING COSTS AND EXPENSES
We expect that our primary operating costs and expenses will consist of the
cost of providing our services and selling, general and administrative expenses.
OPERATING COSTS. Our most significant expense will be the cost of leasing
certain elements of the full "bundle" of traditional telephone services for sale
to our local service subscribers, the cost of leasing part of the data network
being used by our data customers and the cost of leasing parts of the long
distance network being used by our long distance service customers.
We purchase local telephone service for our customers on a "wholesale"
basis pursuant to interconnection agreements with the traditional telephone
companies in our targeted markets. Typically, these agreements establish the
terms and conditions of the interconnection arrangements along with the cost per
minute to be charged by each party for the calls that travel between each
carrier's network.
We provide data services to our customers over our own switches in six
markets and leased fiber optic lines, and in other areas by leasing part of the
data network requirements from various telecommunications companies pursuant to
written agreements.
We have entered into agreements with long distance providers in order to
originate or terminate long distance traffic in areas where we cannot do so over
our own network. These agreements provide for the origination or termination of
long distance services on a per-minute basis and contain minimum usage volume
commitments. If we fail to meet minimum volume commitments, we may be obligated
to pay underutilization charges. To date, we have met our usage volume
commitments and have not incurred any underutilization charges.
To minimize our costs, we lease fiber optic lines between cities on a fixed
cost basis pursuant to written agreements with the providers of fiber optic
lines. These fiber optic lines interconnect our switches, enabling us to
cost-effectively provide much of the data and long distance needs of our
customers. For the needs of our customers beyond our network coverage, we
purchase that capacity on a wholesale basis under our interconnection agreements
with other telecommunications companies.
If we underestimate our need for fiber optic lines, we may be required to
obtain capacity through more expensive means. These costs are usage sensitive
and will increase as our customers' long distance calling volume increases. As
traffic on specific routes increases, we may lease flat-rated long distance
trunk capacity to reduce our variable costs and improve our gross margins.
Once we have deployed a switch in a particular market, we expect that
switch site leasing and maintenance expense will be a significant part of our
ongoing cost of services.
Our primary expense associated with providing Internet access to our
customers is the cost of interconnecting our network with a national Internet
service provider. Currently, we provide our customers direct connectivity to the
Internet through a national Internet access provider.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Our selling, general and
administrative expenses include our infrastructure costs, including selling and
marketing costs, customer care, billing, corporate administration, personnel and
network maintenance expenses.
We employ a direct sales force in each of our markets. To attract and
retain a highly qualified sales force, we offer our sales personnel a
compensation package that emphasizes commissions. We expect to incur significant
selling and marketing costs as we continue to hire additional personnel and
expand our operations.
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We have deployed a state-of-the-art billing system that provides
consolidated billing for all services we provide to our customers on a single
invoice. We began issuing invoices in the first quarter of 1998, billing long
distance services and, subsequently, local, Internet access and other data
services.
We have developed tailored systems and procedures for operational support
and other back office systems that are required to provision and track a
customer order from point of sale to the installation and testing of service.
These systems are operational on a stand alone basis today and will interface
automatically with trouble management, inventory, billing, collection and
customer care systems by the end of the first quarter of 2000. In October 1999,
we implemented e.mpower, our e-commerce, web-based customer interface that
provides customers the ability to review near real-time network utilization
statistics. Subsequent phases will continue to build on this robust feature set
while providing further enhancements and value-added customer capabilities.
Along with the development cost of the systems, we will also incur ongoing
expenses for customer care and billing. As our strategy stresses the importance
of personalized customer care, we expect that the expenses related to our
customer care department will remain a significant part of our ongoing
administrative expenses. We expect the cost to maintain, enhance and operate
these systems and provide these critical functions will grow and will continue
to be a significant part of our ongoing general and administrative expenses.
We incur other costs and expenses, including the costs associated with the
maintenance of our network, administrative overhead, office leases and bad debt.
We expect that these costs will grow significantly as we expand our operations
and that administrative overhead will be a large portion of these expenses
during the initial phases of our business expansion. However, we expect these
expenses to become smaller as a percentage of our revenue as we build our
customer base.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1998.
TOTAL REVENUE. Total revenue for the nine months ended September 30, 1999
increased 217% to $18.7 million from $5.9 million for the nine months ended
September 30, 1998. The increase resulted primarily from the launch of our
offering of communications services to large and medium-sized businesses offset
by the termination of our relationship as a Bell Atlantic agent.
AGENCY REVENUE. Agency revenue, which represents fees earned in our
capacity as a Bell Atlantic sales agent, decreased 100% to zero for the nine
months ended September 30, 1999, from $3.0 million for the nine months ended
September 30, 1998. The decrease resulted from the termination of our Bell
Atlantic agency relationship.
TELECOMMUNICATIONS AND OTHER REVENUE. For the nine months ended September
30, 1999, telecommunications and other revenue increased 523% to $18.7 million
from $3.0 million for the nine months ended September 30, 1998. The increase
resulted from the full launch of our business as a competitive
telecommunications provider in July 1998.
OPERATING COSTS. Operating costs increased 297% to $15.5 million for the
nine months ended September 30, 1999, from $3.9 million for the nine months
ended September 30, 1998. This increase was attributable to the cost of
providing the telecommunications services underlying the increased revenue from
telecommunications services.
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SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased 165% to $26.3 million for the nine months ended September 30,
1999, from $10.0 million for the nine months ended September 30, 1998. This
increase was primarily attributable to the increase in sales, delivery and
support associated with the increase in revenue discussed above, the launch of
our telecommunications services and the hiring of key senior management and
other personnel to develop and implement certain infrastructure initiatives to
support our new non-agent business.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense
increased 600% to $2.1 million for the nine months ended September 30, 1999,
from $0.3 million for the nine months ended September 30, 1998. This increase
was primarily due to amortization of back office systems and software, and
depreciation of network elements and staff related expenses.
OTHER INCOME. Other income increased 1,600% to $3.4 million for the nine
months ended September 30, 1999, from $0.2 million for the nine months ended
September 30, 1998. This change was primarily attributable to a $3.5 million
gain on a negotiated settlement with Bell Atlantic.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997.
TOTAL REVENUE. Total revenue increased 169% to $9.4 million for 1998 from
$3.5 million for 1997. The increase resulted primarily from the launch of our
business as a competitive telecommunications provider to large and medium-sized
businesses.
AGENCY REVENUE. Agency revenue decreased 14% to $3.0 million for 1998 from
$3.5 million for 1997. The decrease resulted primarily from the termination of
our Bell Atlantic agent agreement in June 1998, six months into the year while
we were a Bell Atlantic agent for the entirety of 1997.
TELECOMMUNICATIONS AND OTHER REVENUE. Telecommunications and other revenue
increased 6,400% to $6.5 million from 1998 from $0.1 million for 1997. The
increase resulted primarily from the launch of our business as a competitive
telecommunications provider to large and medium-sized businesses.
OPERATING COSTS. Operating costs increased 778% to $7.9 million for 1998
from $0.9 million for 1997. The increase resulted primarily from the launch of
our business as a competitive telecommunications provider to large- and
medium-sized businesses as discussed above.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased 297% to $15.1 million for 1998 from $3.8 million for 1997.
The increase resulted primarily from the launch of our business as a competitive
telecommunications provider to large- and medium-sized businesses.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
increased 600% to $0.7 million in 1998 from $0.1 million in 1997. This increase
was primarily due to the depreciation expense related to our billing system and
to our furniture and computer equipment and the amortization of software for our
growing employee base.
OTHER INCOME. Other income decreased 38% to $0.5 million for 1998 from $0.8
million for 1997. This change was attributable primarily to a one-time gain on
sale of our consulting division.
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YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1996.
TOTAL REVENUE. Total Revenue increased 84% to $3.5 million for 1997 from
$1.9 million for 1996. The increase resulted primarily from an increase in sales
to existing customers and the development of additional customer relationships
to large and medium-sized businesses.
AGENCY REVENUE. Agency revenue increased 84% to $3.5 million for 1997 from
$1.9 million for 1996. The increase resulted primarily from an increase in unit
sales under the Bell Atlantic contract.
TELECOMMUNICATIONS AND OTHER REVENUE. Telecommunications and other revenue
increased to $88,000 for 1997 from $18,000 for 1996. The increase resulted
primarily from the development of additional customer relationships.
OPERATING COSTS. Operating costs increased 80% to $0.9 million for 1997
from $0.5 million for 1996. This increase was attributable to additional
staffing of customer service and support necessary for the increase in customer
base as discussed above.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased 192% to $3.8 million for 1997 from $1.3 million for 1996,
primarily attributable to the increase in sales delivery and support associated
with the increase in sales as discussed above and certain infrastructure
initiatives to support the new non-agent business.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
increased 270% to $0.1 million for 1997 from $27,000 for 1996. This increase was
primarily due to depreciation expense associated with furniture and computer
equipment and amortization of software for our growing employee base.
OTHER INCOME. Other income increased 4,606% to $0.8 million for 1997 from
$17,000 of expenses for 1996. This change was attributable primarily to a
one-time gain on sale of our consulting division.
LIQUIDITY AND CAPITAL RESOURCES
The development of our business, the deployment and start-up of switching
facilities in our targeted markets and the establishment of reliable operations
support systems will require significant capital to fund the following:
- capital expenditures,
- working capital needs,
- debt service and
- the cash flow deficits generated by operating losses.
Our principal capital expenditure requirements will include:
- the purchase and installation of digital switches,
- the development of operations support systems and other automated back
office systems and,
- in certain cases, the overbuilding of leased fiber lines in those
instances where traffic volume growth makes it economically attractive to
do so.
Future overbuilds of leased fiber optic lines and potential strategic
acquisitions may increase capital requirements, although cash requirements may
be reduced if network expansions are accomplished over a longer time frame or if
we do not continue to experience significant sales growth.
To date, we have funded our start-up expenditures through the private sale
of equity securities and a senior term loan facility with Nortel. In November
1998, May 1998 and October 1997, we raised a combined total of approximately
$50.5 million through the private placement of
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our preferred stock. We have entered into a credit agreement with Nortel
Networks whereby Nortel will provide draws to us under a term loan arrangement
in an aggregate principal amount of up to $75 million. These are to be used for
the purchase of telecommunications equipment and related software licenses and
for working capital purposes. To secure the facility, we have granted Nortel a
security interest in all of our assets. The loans must be repaid over a
five-year period commencing November 2001. Interest payments are due monthly in
the case of base rate (prime based) draws or at the end of the LIBOR loan
period. Interest will accrue at a lower rate if we meet specified financial
tests. As of September 30, 1999, we had $24.3 million outstanding under this
senior term loan facility. On December 23, 1999, TD Securities (USA), Inc. and
Goldman Sachs Credit Partners L.P. purchased this facility.
In July 1999, we issued to Nortel a senior discount note with a face amount
of $75 million. This note accrues interest at the Treasury rate plus 8% per
annum and requires no interest or principal payments until July 2004. For the
next five years thereafter, we must pay interest semi-annually at an interest
rate of 13.5%. The note must be repaid in full upon the closing of this
offering. As of December 31, 1999, we had no principal amounts outstanding under
this senior discount note. However, on January 7, 2000, we borrowed $42 million
dollars under this facility.
In conjunction with the issuance of these amended notes, we issued warrants
to purchase 1,119,992 shares of common stock at $0.008 per share.
Net cash used in operating activities was $15.5 million for the nine months
ended September 30, 1999 and $6.7 million for the nine months ended September
30, 1998. The increase of $8.8 million is primarily due to an increase in
operating losses, offset by an increase in non-cash reconciling items for
depreciation and amortization and an increase in accrued liabilities. Net cash
used in investing activities was $26.9 million for the nine months ended
September 30, 1999 and $1.5 million for the nine months ended September 30,
1998. The increase of $25.4 million represents an increase in capital
expenditures during the nine months ended September 30, 1999 for our expansion
into new markets. Net cash provided by financing activities was $22.2 million
for the nine months ended September 30, 1999 and $16.4 million for the nine
months ended September 30, 1998. The increase of $5.8 million is the result of
an increase in borrowings under notes payable of $24.3 million offset by an
increase in repayments of capital leases of $1.9 million and a decrease in funds
raised from preferred stock of $17.0 million. Our capital expenditures were
approximately $2.0 million in 1998 and approximately $37 million in 1999 and are
currently expected to be approximately $130 million in 2000.
We estimate that Phases I and II of our business plan, as currently
contemplated, including future capital expenditures, operating losses associated
with the rollout of our network in new and existing markets and working capital
needs, require approximately $430 million from the beginning of Phase I through
the point when we anticipate these phases will become cash flow positive. Upon
completion of this offering, we will have pre-funded more than 60% of these
capital requirements with:
- cash,
- cash equivalents and short-term investments currently on hand,
- committed borrowing capacity under our $75 million senior term loan
facility with TD Securities (USA), Inc. and Goldman Sachs Credit Partners
L.P., and
- anticipated cash flows from future operations.
We plan to raise the remaining $165 million needed to complete Phases I and
II from alternative sources, which may include additional bank or vendor debt.
We believe our equity base of $190.5 million and the continued execution of our
business plan will enable us to access these capital sources shortly after this
offering. We expect that funding the capital expenditures and operating losses
associated with Phase III, as currently designed and at current prices for
network equipment, through the projected time that it becomes cash flow positive
will require an incremental $130 million. To the extent we proceed with Phase
III as planned, we expect to pre-
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fund these requirements by raising additional capital from the equity or debt
markets on an opportunistic basis.
We expect to make significant capital outlays for the foreseeable future to
continue the development activities called for in our current business plan and
to fund expected operating losses. Until such time as we begin to generate
positive cash flow from operations, these capital expenditures will need to be
financed with additional debt and equity capital. We believe that our current
resources, together with the net proceeds of this offering, will be sufficient
to satisfy our liquidity needs for the succeeding 12 months; however, we cannot
assure you to that effect. Thereafter, we will need substantial additional
capital. If our plans or assumptions change, if our assumptions prove to be
inaccurate, or if we experience unexpected costs or competitive pressures, we
will be required to seek additional capital sooner than currently expected. In
particular, if we elect to pursue significant additional acquisition
opportunities, our cash needs may be increased substantially, both to finance
any such acquisitions and to finance development efforts in new markets. We
cannot assure you that our current projection of cash flow and losses from
operations, which will depend upon numerous future factors and conditions and
many of which are outside of our control, will be accurate. Actual results will
almost certainly vary materially from our current projections. It is likely that
actual costs and revenues will vary from expected amounts which will likely
affect our future capital requirements. Because our cost of expanding our
network services and sales efforts, funding other strategic initiatives and
operating our business will depend on a variety of factors, including, among
other things:
- the number of subscribers and the services for which they subscribe,
- the nature and penetration of services that may be offered by us,
- regulatory and legislative developments, and
- the response of our competitors to a loss of customers to us and changes
in technology.
We intend to seek additional debt and equity financing to fund our
liquidity needs after we use the proceeds from this offering. We cannot assure
you that we will be able to raise additional capital on satisfactory terms or at
all. If we decide to raise additional funds through the incurrence of debt, our
interest obligations will increase and we may become subject to additional or
more restrictive financial covenants. If we decide to raise additional funds
through the issuance of equity, the ownership interests represented by the
common stock will be diluted. In the event that we are unable to obtain such
additional capital or to obtain it on acceptable terms or in sufficient amounts,
we may be required to delay the development of our network and business plans or
take other actions that could materially and adversely affect our business,
operating results and financial condition.
PROPOSED SALE OF ACCESS LINES
On January 7, 2000, we entered into a letter of intent with Access One
Communications Corporation which we anticipate will result in the sale of
approximately 285 resale customer accounts representing approximately 10,000
access lines. Under the terms of the letter of intent, Access One will pay us
$750 per access line, subject to downward adjustments if either (i) certain
gross margin targets are not met within 90 days from the closing date or (ii)
there is customer attrition within 90 days from the closing date. Access One
will also have a right of first refusal to acquire any future resale customers
that we may offer for sale for a two year period from closing. This sale is
expected to increase average access lines per customer by 47% from approximately
68 to approximately 100 and reduce customer count by approximately 25% from
1,100 to 815.
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IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 issue results from computer programs being written using two
digits rather than four to define the year. Any of our computer programs or
systems, or those of our suppliers, that have date-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculation causing the disruption of
operations, including among other things:
- A temporary inability to process transactions;
- A temporary inability to send invoices;
- A temporary inability to engage in normal business activities; and
- Interruptions of customer care.
We did not experience any problems on January 1, 2000 and to date, we have
not experienced, nor are we aware of, any material Year 2000 issues with any of
our internal systems or our services, and we do not anticipate experiencing such
issues in the future. Further, we are unaware of any issues with our vendors,
suppliers or customers that will materially affect us.
Our Year 2000 Steering Committee oversees a team responsible for monitoring
the assessment and remediation status of our Year 2000 issues and reports the
findings to our management and Board of Directors. This Steering Committee
retained an outside consulting firm to assess the potential effect and costs of
remediating Year 2000 issues for our internal systems.
We believe that we have identified all major computers, software
applications and related equipment used in connection with our internal
operations that will need to be modified, upgraded or replaced to minimize the
possibility of a material disruption to our business. Under the direction of the
Steering Committee, we have completed assessing the potential impact of Year
2000 issues on these computers, equipment and applications and have modified,
upgraded and replaced major systems that we believe have Year 2000 issues.
In addition to computers and related information, operation, and network
systems, the operation of office systems, facilities and equipment, such as fax
machines, security systems and other common office devices, may have Year 2000
issues that have not yet surfaced. We will continue to monitor the performance
of these office systems, equipment and facilities.
We are actively contacting third-party suppliers of components and
telecommunications services, and our key subcontractors used in the delivery of
our services to identify, and to the extent possible, resolve issues relating to
the Year 2000 issue. While we expect that we will be able to resolve any
significant Year 2000 issues identified with these third parties, because we
have no control over the actions of these parties, these third parties may not
remediate any or all of the Year 2000 issues identified. Any failure of any of
these third parties to timely resolve Year 2000 issues with either their
products sold to us, or their systems could have a material adverse effect on
our business, operating results and financial condition. In addition, the
delivery of our services is also dependent on the operation of the networks of
many local exchange carriers and long distance carriers with whom we must
interact as part of our normal business operations, but with whom we do not have
formal contractual arrangements. Consequently, failure of these carriers'
networks to fully operate as a result of Year 2000 issues could also affect our
operations. To our knowledge, none of these networks experienced any problems on
or since January 1, 2000.
Our total cost to proactively address our Year 2000 issues was
approximately $0.3 million. The cost of addressing Year 2000 issues will be
reported as a general and administrative expense.
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We believe we identified and resolved all Year 2000 issues that could
materially and adversely affect our business operations. However, for the
reasons discussed above, we believe that it is not possible to determine with
complete certainty that all Year 2000 issues affecting us have been identified
or corrected and we may not know that this is true for several months. As a
result, we believe that the following consequences are possible:
- operational inconveniences and inefficiencies for us that will divert our
management's time and attention and our financial and human resources
from ordinary business activities;
- business disputes and claims for pricing adjustments or penalties by our
customers due to Year 2000 issues, which we believe will be resolved in
the ordinary course of business; and
- business disputes alleging that we failed to comply with the terms and
conditions of contracts or industry standards of performance that result
in litigation or contract termination.
We developed contingency plans to be implemented if our efforts to identify
and correct Year 2000 issues affecting our internal systems were ineffective. We
have adopted the Year 2000 contingency plans as our standard operational
contingency plans. Our contingency plans are designed to minimize the
disruptions or other adverse effects. Our plans include:
- accelerated replacement of affected equipment or software;
- short to medium-term use of backup equipment and software;
- increased work hours for our personnel; and
- use of contract personnel to correct on an accelerated schedule any Year
2000 issues that arise or to provide manual workarounds for information
systems.
Our implementation of any of these contingency plans could require us to
expend additional funds and could have a material adverse effect on our
business, operating results and financial conditions. Our efforts in this
regard, if necessary, will be to minimize expense associated with the
implementation and use of any contingency planning with our objective to employ
the least costly plan necessary to address the relevant operational issues.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We do not have operations subject to risks of foreign currency
fluctuations, nor do we use derivative financial instruments in our operations
or investment portfolio. Our earnings are affected by changes in interest rates
as our long term debt has variable interest rates based on either the Prime Rate
or LIBOR. If interest rates for our long term debt average 10% more in 1999 than
they did during 1998, our interest expense would increase, and loss before taxes
would increase by $1.7 million for the nine months ended September 30, 1999.
These amounts are determined by considering the impact of the hypothetical
interest rates on our borrowing cost and outstanding debt balances. These
analyses do not consider the effects of the reduced level of overall economic
activity that could exist in such an environment. Further, in the event of a
change of such magnitude, management would likely take actions to further
mitigate its exposure to the change. However, due to the uncertainty of the
specific actions that would be taken and their possible effects, the sensitivity
analysis assumes no changes in our financial structure.
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BUSINESS
OVERVIEW
We are a rapidly-growing, innovative provider of state-of-the-art broadband
telecommunications services. Our strategy is to focus on high-end customers,
primarily large- and medium-sized businesses, having a minimum of 50 business
access lines and spending over $50,000 annually for Internet, data and voice
telecommunications services. As a competitive telecommunications provider, we
offer businesses located throughout the mid-Atlantic and northeastern regions of
the United States cutting-edge, responsive solutions as an alternative to the
traditional telephone companies. Today, we offer an integrated package of
high-speed data services, Internet services, local services and long distance
services, primarily delivered from our own network over a single broadband
connection and conveniently billed on a single invoice. Since the introduction
of our Net2000-banded services in July 1998, we have successfully acquired over
1,100 new business customers, representing approximately 78,000 access lines. As
of December 31, 1999, our rapidly growing sales force consisted of 152 people.
BUSINESS STRATEGY
We strive to be the provider of choice of integrated business
telecommunications services in our target markets. We believe that our six-year
operating history, existing customer base and substantial experience will enable
us to implement effectively our growth strategy. The key elements of our
strategy include the following:
TARGET HIGH-END TELECOMMUNICATIONS USERS
Over the last six years, we have sold local telephone data and voice
services to high-end businesses. Our average customer has over 68 access
lines, having bandwidth provided by three high-capacity digital
transmission lines known as T-1 lines. When we complete the anticipated
sale of approximately 285 resale customer accounts representing
approximately 10,000 access lines, our average access lines per customer
is expected to increase 25% from approximately 68 to approximately 100.
More than 50% of our customers purchase multiple services from us. Some
of our customers include American Diabetes Association, Cable & Wireless
plc, Dunbar Armored, Duron Paint, Georgetown University Law Center,
Icelandair, Johns Hopkins University, MicroStrategy Incorporated,
MindSpring Enterprises, Inc., Newsweek, Pepco Energy Services,
soldout.com, Teleglobe, The Corcoran Group, The George Washington
University Health Plan and Vialog Communications.
ACQUIRE CUSTOMERS BY USING OUR PROVEN SALES AND MARKETING TECHNIQUES
- UTILIZE OUR EXPERIENCED SALES STAFF TO EXPAND EXISTING CUSTOMER
RELATIONSHIPS AND ACQUIRE NEW CUSTOMERS. Since 1993, we have utilized a
highly-consultative sales approach whereby experienced sales executives
work with new and existing customers to analyze their needs. This
personalized approach enables us to optimally configure each customer's
services and deliver superior customer care. Using this approach, we have
established close relationships with over 3,000 businesses, of which over
1,100 are current customers of Net2000-branded services; and
- OFFER A BUNDLED SERVICE OFFERING ON A SINGLE INVOICE. We are one of the
first companies in the industry to offer a bundled package of high-speed
data services, Internet services, local services and long distance
services, through a single broadband connection that is conveniently
billed on a single invoice. We believe that our ability to offer this
enhanced package will continue to provide us with a strategic advantage
in the marketplace.
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USE TECHNOLOGY, INCLUDING WEB-BASED SOLUTIONS, AND STATE-OF-THE-ART BACK
OFFICE SYSTEMS TO DELIVER SUPERIOR CUSTOMER CARE
- INCREASE CUSTOMER LOYALTY THROUGH OUR PROPRIETARY WEB-ENABLED SELF-CARE
SYSTEM. Our proprietary, web-based customer interface, e.mpower, uses to
our advantage the power of the Internet by providing our customers with
an e-commerce tool to manage and procure their telecommunications
services. We believe we are revolutionizing our customers' buying
experiences by providing them direct access to information regarding
network performance, ordering services, capacity use on the network,
billing data and management reports. Currently, e.mpower enables our
customers 24 hours per day, seven days per week, to order services,
report troubles, initiate and view the status of trouble tickets, analyze
invoice data and access network utilization statistics, which are updated
every 15 minutes.
- UTILIZE STATE-OF-THE-ART, READILY EXPANDABLE INFORMATION SYSTEMS. Our
operational support systems consist of software applications from ADC
Telecommunications, Inc. (formerly Saville Systems plc), Metasolv
Software, Inc., Siebel Systems, Inc., Wisor Telecom Corporation,
Linguateq Incorporated and DSET Corporation. These systems, which are
integrated and readily expandable, enable us to reduce costs and shorten
the interval between a customer's order and service installation by
eliminating repeated manual data entry; and
- CONTINUE TO FOCUS ON EXCELLENCE IN CUSTOMER CARE TO MAINTAIN HIGH
CUSTOMER RETENTION RATE. Our heritage and focus as a sales, marketing and
customer care company have generated customer loyalty and a low annual
customer churn rate of approximately 3% annually for all of our
customers, including our resale and our network customers.
CONTINUE BUILD-OUT OF OUR DATA-FOCUSED NETWORK TO MAXIMIZE SPEED TO MARKET AND
MINIMIZE INVESTMENT RISK
- DEPLOY INNOVATIVE, SMART-BUILD NETWORK WITH LIMITED COLLOCATION. Our
approach is to deploy and own the key elements of our network necessary
to establish customer loyalty, including proprietary back office systems
and data and voice switches that can be modified for the service
provided. We lease fiber optic lines to interconnect our switches. This
strategy greatly mitigates capital risk and allows us to take advantage
of falling costs of network elements and new technologies, including
digital subscriber line, or DSL, technology;
Our smart-build strategy differs from those of other competitive
telecommunications providers in several ways because we:
- LEAD WITH DATA. We initiate service in new markets by first deploying
lower-cost data switches. This better positions us to address the
complex data needs of larger business customers and generates traffic on
our national network in targeted markets before investing significant
capital in multi-service communications equipment capable of supporting
data, voice and multi-media services;
- BACK-FILL WITH VOICE. When data traffic and customer concentration reach
an optimal level, we install multi-service communications equipment in
an incremental fashion to meet our customers' growing needs;
- ENHANCE MARGINS UTILIZING DSL TECHNOLOGY. We can use to our advantage
the industry's rapid deployment of DSL technology and the effects of
recent regulatory rulings to reduce our cost of connecting customers to
our network by up to 50%; and
- MINIMIZE COLLOCATION WITH TRADITIONAL TELEPHONE COMPANIES. Unlike other
competitive telecommunications providers, we do not presently collocate
our network equipment in the traditional telephone company central
offices. This allows us to open new markets faster and have greater
control over service quality. In order to capitalize on a recent
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<PAGE> 33
regulatory ruling, we plan to establish one traditional telephone company
collocation in each market to allow us to reduce the cost of our customer
connections.
- CONTINUE TO INSTALL STATE-OF-THE-ART NETWORK. Our Nortel-based flexible
network design supports state-of-the-art, broadband data and voice
telecommunications services, and is designed to support evolving data
technologies with minimal additional capital expenditures; and
- OPTIMIZE CUSTOMER CONNECTIONS TO INCREASE MARGINS. By utilizing newly
developed equipment, we can place more services on the same three T-1
lines at our average customer site, thereby allowing us to generate more
revenue without increasing our operating costs.
USE THE EXPERIENCE OF OUR PROVEN MANAGEMENT TEAM
Our proven senior management team has an average of 20 years of
telecommunications experience with industry leading corporations, including
AT&T, Bell Atlantic, MCIWorldcom, Nortel and Qwest. This experience has been a
major factor in our success to date and will continue to play a key role in the
execution of our strategy.
CAPITALIZE ON OUR STRATEGIC BUSINESS PARTNERSHIP WITH NORTEL NETWORKS
- MAINTAIN FULL-TIME ON-SITE TECHNICAL AND OPERATIONAL SUPPORT. As part of
our agreement, Nortel has provided us with 22 dedicated full-time
employees to support our network build-out;
- MITIGATE TECHNOLOGICAL OBSOLESCENCE. The Nortel equipment in our network
can be upgraded from traditional voice to data switching at modest cost;
and
- TAKE ADVANTAGE OF NORTEL'S EQUITY POSITION. Nortel has provided us with a
$30 million equity investment and $150 million debt and equipment
financing for the build-out of our network. This investment more closely
aligns our mutual business and technical interests.
MARKET OPPORTUNITY
We believe that the Telecommunications Act and certain state regulatory
initiatives provide substantial opportunities in the telecommunications
marketplace by opening local markets to competition and requiring the
traditional telephone companies to provide increased access to connect our
network to theirs for exchanging data and voice traffic. In addition, we believe
that accelerated growth rates in local traffic related to increased demand for
Internet access, interoffice communications and other data service applications
and the desire for "one-stop shopping" by business customers presents an
attractive opportunity for new entrants to achieve product differentiation and
significant penetration into this very large, established market.
The two main segments of the telecommunications industry, voice and data
services, continue to drive growth. The Yankee Group, a leading industry
analyst, estimates that the voice services market in the United States is
expected to grow from $224 billion in 1998 to $281.5 billion in 2002, and the
data services market in the United States will grow from $22.3 billion in 1998
to $61.7 billion in 2002. This growth in the data services market represents a
compounded annual growth rate of 29.0%. High-speed data services and Internet
connectivity have become important to business due to the dramatic increase in
Internet usage and the proliferation of personal computer and IP-based
applications.
We believe we are well-positioned to capitalize on the overall growth of
the telecommunications industry. As of December 31, 1999, our 13 Phase I markets
represented a region with more
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<PAGE> 34
than 9 million business access lines. This equates to approximately one-fifth of
total United States business lines according to TeleCon, LLC, an independent
telecommunications research firm. In Phase III of our deployment, we plan to
extend our network to include markets encompassing approximately one-half of the
business access lines in the United States. The following table sets forth
certain information from TeleCon regarding the markets in which we currently
operate and the markets we plan to enter by the end of 2002.
<TABLE>
<CAPTION>
BUSINESS ACCESS
MARKET LINES
- ------ ---------------
<S> <C>
Phase I:
Washington, DC 1,527,799
Baltimore, MD 585,289
Richmond, VA 248,548
Norfolk, VA 344,960
New York, NY 2,289,680
Boston, MA 1,440,942
Williamsburg, VA 16,247
Long Island, NY 759,989
Newark, NJ 931,929
Philadelphia, PA 1,180,532
Providence, RI 230,876
Frederick, MD 37,616
Roanoke, VA 65,911
Phase II:
Denver, CO 480,972
Atlanta, GA 875,543
Los Angeles, CA 3,179,616
Wilmington, DE 114,260
Charlotte, NC 279,263
Pittsburgh, PA 412,462
Chicago, IL 2,191,806
Dallas/Fort Worth, TX 1,054,348
San Jose, CA 564,285
Salt Lake City, UT 227,270
Philadelphia, PA Included Above
Phase III:
Chicago, IL Included Above
Miami, FL 453,323
Charlotte, NC Included Above
San Francisco, CA 1,169,218
Houston, TX 922,816
Los Angeles, CA Included Above
Denver, CO Included Above
Dallas/Fort Worth, TX Included Above
Pittsburgh, PA Included Above
Seattle, WA 458,393
</TABLE>
Data for Los Angeles, CA includes Orange County, CA and data for San Francisco,
CA includes Oakland, CA.
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<PAGE> 35
SERVICES
We have designed our service offerings to meet the specific needs of
business customers in our target markets. Our integrated network access service
allows customers to combine data services, such as frame relay, private line or
Internet access and voice services, local and long distance, on the same high
capacity network access circuit, thereby reducing the cost of these services.
Unlike many telecommunications services providers, we can offer all Net2000
services to our customers using the same broadband network connection. We offer
a comprehensive selection of data and voice services including:
- high-speed data communications;
- voice;
- domestic and international long distance; and
- Internet access.
All of these services are supported by e.mpower, our innovative web-based
customer care application. We also provide billing for all of these services on
a single invoice. Our products and services include:
DATA COMMUNICATIONS SERVICES
- WIDE AREA NETWORK INTERCONNECTION. We provide businesses with high-speed
data connectivity between locations throughout the United States. These
connections are typically over T-1 lines, T-3 lines, each of which is
equivalent to 28 T-1 lines, and asynchronous transfer mode connections.
Asynchronous transfer mode is a high speed technology that collapses
voice, video and data onto the same network. Asynchronous transfer mode
uses switches to establish an end-to-end connection which allows complete
control of the quality of service provided. We currently provide this
connectivity over our own asynchronous transfer mode backbone in the
mid-Atlantic and northeastern regions of the United States and utilize
our interconnection with other carriers to provide services throughout
other areas of the United States. As we continue our national
asynchronous transfer mode backbone deployment, which we anticipate to be
substantially complete in late 2000, we will be able to provide a large
percentage of these connections on our own network. In addition, many
Internet and other enhanced service providers are collocating equipment
in our switching centers, thereby allowing them to utilize our backbone
wide area network connections between major cities.
- FRAME RELAY. We offer high-speed frame relay to customers throughout the
United States. We provide this service today over our six data switches
and network-to-network interconnections with other national carriers.
- PRIVATE LINE SERVICE. Our private line service provides digital
connectivity between customer locations for data or voice traffic. We
offer both local private line services for connecting offices within a
metropolitan area and long distance private line services for connecting
offices beyond geographic boundaries established by regulatory bodies.
- HIGH-SPEED INTERNET ACCESS. We provide customers with a variety of
Internet access offerings. Our Internet access services range from very
high bandwidth connections to lower speed, dedicated 128 kilobits per
second and frame relay connections. For customers that subscribe to more
than one service, we provide high-speed Internet access coupled with any
of our other services over a single broadband facility.
- ENHANCED INTERNET ACCESS SERVICES. Our enhanced Internet access services
provide full-time connections to the Internet as well as several
associated services. Customers can utilize this access in combination
with customer-owned equipment and software to establish a presence on the
web or to provide e-commerce services. We also offer a
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<PAGE> 36
managed Internet access solution, which provides the customer with the
networking equipment required to access the Internet, (such as routers
and channel service units). Enhanced Internet access services also
include obtaining IP addresses, registration of company domain names
(i.e., companyname.com) with the appropriate organization, newsfeeds for
participation in discussion groups and domain name services which
translate Internet addresses to facilitate routing across the Internet.
Our web based e-mail services provide the customer with electronic mail
using a web browser.
VOICE SERVICES
LOCAL SERVICES. We provide customers with a variety of local
telecommunications services designed to meet their specific needs.
- CONNECTION PRODUCTS. We offer the same traditional and enhanced local
telecommunications services offerings as the traditional telephone
companies. These services include:
- traditional business lines (private branch exchange, or PBX,
interconnection trunks);
- direct inward and outward dial trunks; and
- analog and digital access.
In contrast to the traditional telephone companies, we offer a simplified
equipment interface which saves customers money and provides a user-friendly
billing format. With the recent advent of local number portability, customers
can choose to keep their existing phone numbers. We have found local number
portability to be an increasingly useful tool to capture existing business from
our primary competitors, the traditional telephone companies.
- ENHANCED SERVICE FEATURES. Through our advanced data and voice switches
that can be modified for the services provided, we offer and support over
100 features to enhance customers' telecommunications usage with features
such as call forwarding, call transferring, caller ID, call waiting,
three-way calling and call holding. We also offer operator services,
directory assistance and 911 emergency service capability.
LONG DISTANCE SERVICES. We provide a comprehensive line of domestic and
international long distance services. We offer all customers connected to our
network, low-cost dedicated access rates irrespective of calling volume. This
allows customers to further optimize their network access and equipment
configuration by minimizing the need for special access or overflow lines.
- INBOUND SERVICES. We are able to provide 800/888 toll free services
through our own long distance service or by reselling long distance
service in all 50 states, Canada and the surrounding territories to help
our customers improve their relations with customers, employees and
investors.
- OUTBOUND SERVICES. We offer a number of long distance service packages
created to meet the needs of our customers based on volume and calling
patterns including 1+ outbound calling. Our account codes feature,
whereby a customer enters an account code on the telephone key pad,
allows us to provide a monthly invoice showing outbound usage by account
code. Customers typically use account codes to itemize call activity
based on department, client, business unit or individual.
- OPERATOR SERVICES. Our customers have access to operator services for
assistance in placing calls.
- CALLING CARDS. We offer calling cards to make calls while traveling in
the United States and selected international locations.
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<PAGE> 37
COLLOCATION, REMOTE ACCESS AND OTHER CARRIER SERVICES
We offer collocation services to Internet service providers and other
carriers. Our Internet service provider customers are able to establish local
number dial access, or points-of-presence, in any city on our backbone network,
without incurring additional real estate, equipment, toll and line charges.
Further, collocation allows Internet service providers and other carriers to
quickly install and provide an immediate low-cost, highly reliable connection to
the full suite of our services and asynchronous transfer mode backbone.
We offer between 900 and 6,400 square feet of collocation space in our
multi-service communications centers. The average customer uses 20 square feet
of collocation space in our multi-service communications centers. Collocation
provides our customers with inexpensive equipment housing, in a highly secure,
environmentally controlled and monitored space. As of December 31, 1999, we had
over 11,000 square feet of dedicated collocation space available and we expect
to have 29,600 square feet of collocation space by April 2000. We expect this
space to increase significantly as our switch deployment progresses.
SALES AND CUSTOMER CARE
We market our services by providing each customer with a responsive,
highly-trained face-to-face executive sales team supported by customer care
managers. These teams provide customized solutions and a point-of-contact for
each of our customers. We believe that this personalized, attentive approach to
sales and service facilitates incremental sales of new services to existing
customers, while maximizing customer retention.
SALES -- DIRECT SALES
We currently market our telecommunications services through our rapidly
growing direct sales force as well as through sales agents. As of December 31,
1999, our sales force consisted of 152 people, excluding contractual
relationships with five sales agents. Our sales executives are located in sales
offices servicing eight markets, including metropolitan Washington, D.C., New
York City, Long Island, Boston, Providence, Baltimore, Richmond and Norfolk.
Over the next 12 months, we plan to aggressively grow our sales staff in
existing markets and open sales offices in northern New Jersey, Philadelphia,
Wilmington and Atlanta. We supplement our sales efforts through:
- trade shows;
- seminars;
- outsourced telemarketing for lead generation;
- direct mail campaigns;
- regional advertising; and
- utilization of database tools, such as mining.
The following table sets forth each of our existing and proposed sales
office locations, the date we plan to open each proposed office, the number of
direct sales representatives currently
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<PAGE> 38
located in each office and the number of direct sales representatives we intend
to be located in each office at year-end 1999, 2000 and 2001.
<TABLE>
<CAPTION>
DIRECT SALES STAFF
--------------------------------------------
AS OF PLANNED PLANNED
OFFICE DECEMBER 31, YEAR END YEAR END
STATUS 1999 2000 2001
MARKET ------- ------------ -------- --------
<S> <C> <C> <C> <C>
Washington, DC open 36 48 49
Baltimore open 16 31 32
Richmond open 13 35 38
Norfolk open 13 31 30
New York open 9 27 45
Long Island open 7 19 31
Newark open 4 21 28
Boston open 10 33 51
Providence open 5 9 13
Philadelphia planned 0 24 37
Phase II markets planned 0 48 188
Phase III markets planned 0 10 58
</TABLE>
We believe our target market, large- and medium-sized businesses, are
largely underserved by traditional telephone companies and have needs that are
too complex for other competitive telecommunications providers to serve. In
order to achieve our goal of sales excellence, we employ four key strategies:
- selectively recruit experienced sales personnel;
- provide extensive and continuous training;
- segment our sales teams based on experience; and
- offer a full portfolio of competitively priced services.
Our sales executives are segmented based on their typical experience and
track record of success:
ACCOUNT MANAGERS. Our account managers are proven professionals with two or
more years of general sales experience and focus on businesses spending
$15,000 per month or less.
SENIOR ACCOUNT MANAGERS. Our senior account managers have four or more
years of proven sales experience, including experience in the
telecommunications industry and focus on businesses spending $10,000 to
$25,000 per month.
MAJOR ACCOUNT MANAGERS. Our major account managers are our most senior
sales executives, having five to seven years of telecommunications sales
success and focus on businesses spending $20,000 to $1 million per month.
In addition to our new customer acquisition sales force, we utilize a
client solutions group and a carrier sales team.
CLIENT SOLUTIONS GROUP. Our client solutions group focuses on retaining and
selling additional services to existing customers. This group's initial
sales effort is to convert as many of our 1,100 existing resale and 2,000
former agent customers as possible to our network. After this initiative is
complete, beginning in the second half of 2000, this group will focus on
selling incremental services to all existing customers. New customers are
generally transitioned to this group 120 days after service is installed.
CARRIER SALES TEAM. Our wholesale or "carrier" sales organization focuses
on selling collocation and other tailored solutions to Internet service
providers and carriers.
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<PAGE> 39
All of these sales teams are supported by a support organization and
marketing organization which provides customer prospect management, customer
sales record extraction and analysis, pricing and proposal generating.
The following table describes our sales force:
<TABLE>
<CAPTION>
SALES FORCE BY TYPE
----------------------------------
AS OF PLANNED PLANNED
DECEMBER 31, YEAR END YEAR END
1999 2000 2001
------------ -------- --------
<S> <C> <C> <C>
Account Managers............................................ 54 188 349
Senior Account Managers..................................... 29 59 123
Major Account Managers...................................... 11 31 53
Client Solutions Group Representatives...................... 7 26 28
Sales Management............................................ 12 32 47
Carrier Sales............................................... 5 10 20
Marketing and Sales Support................................. 37 78 130
--- --- ---
Total.................................................. 152 424 750
=== === ===
</TABLE>
Our sales executives meet with prospective customers to gain a thorough
understanding of their business and telecommunications requirements. Sales
executives then submit a professional, highly-customized and comprehensive
proposal that outlines several alternatives for operational enhancements and
cost savings based on an integrated bundle of services.
To attract and motivate sales professionals, we generally provide a
comprehensive compensation package which includes a competitive base salary,
stock options and a non-capped commission plan based on sales results. The
commission structure targets approximately 60% of a sales executive's
compensation to be derived from new and incremental revenue generation.
In 1999, direct sales accounted for 99% of our revenue and we estimate 94%
of our revenue in 2000 will be generated through direct sales.
SALES -- INDIRECT SALES
In addition to our direct sales team, we utilize sales agents who sell our
services and typically focus on specific niche markets or industries, augmenting
our direct sales initiatives. Customers acquired through agents are serviced by
our customer care representatives, are invoiced by us and have the same direct
relationship with us as any of our other customers.
Over the past six years, our customer acquisition efforts also have been
bolstered by entering into strategic relationships with various industry
vendors. We establish these relationships with systems integrators,
"interconnect" or equipment companies and others which offer complementary
telecommunications products and services to the same group of target customers.
For example, our sales staff works closely with Lucent Technologies on a weekly
basis to make joint customer sales calls and proposals. This strategic
relationship has been in place for five years and has proven to be beneficial
for facilitating sales.
CUSTOMER CARE
Given our heritage is as a sales, marketing and customer care company, we
pride ourselves on providing the best possible customer care in the industry. To
this end, we provide an installation sales manager and customer care
representative to each new customer. The role of the installation manager is to
manage and oversee the implementation of the customer's telecommunications
services. The customer care manager is the primary point of contact for the
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<PAGE> 40
customer after the installation is complete. The customer care effort is
complemented by our 24 hours per day, seven days per week customer response
center.
We are investing in a sophisticated customer relationship management, or
CRM, system that is integrated with an automated call distribution, or ACD,
platform. This system identifies the incoming phone number and matches it with
the customer's name and account information including reported troubles and
services installed along with other key account information. If the designated
customer care manager is unavailable to take the call, the call is re-directed
along with all customer information to our customer response center. This call
treatment is transparent to the customer.
We believe that knowledgeable and well-trained employees are necessary to
provide the proper level of customer care to our large target customers. As a
result, all customer care managers, installation managers, installation
personnel, customer response center representatives and field installation
technicians receive continuous training, including rigorous technical, customer
care and corporate culture training. Extensive case studies, role playing and
immediate peer and instructor feedback during the training program give our
employees the knowledge and confidence to provide comprehensive support to
customers on the full range of Net2000 services. All training is developed and
conducted in-house by full-time "faculty" at "Net2000 University". We believe
our training program provides us with a key strategic advantage.
Each customer care team is carefully selected and closely managed to ensure
that a broad range of technical and support experience is available to address
customer requests or concerns. Sales executives work closely with customer care
and installation professionals to provide responsive service and support for the
customer.
Our customer response center operates 24 hours per day, seven days per week
from our new operations center in Herndon, Virginia. Our network operations
center, located adjacent to our customer care personnel, houses technical staff
who monitor our network and switches. This center allows us to remotely diagnose
and correct problems or dispatch technicians. Our investment in service
automation and trouble resolution software reduces the time required for
customer care resolution. In addition, Nortel provides on-site switch
technicians to support our network operations center.
In October 1999 we launched e.mpower, our user-friendly web-based tool to
provide our customers with billing data as well as access to network performance
and bandwidth utilization information. Currently e.mpower enables our customers
24 hours per day, seven days per week to order services, report and check on the
status of troubles and outages, view and analyze invoice data and access network
utilization statistics which are updated every 15 minutes. Subsequent phases
will continue to build on this robust feature set while continuing to provide
customer centric capabilities. We believe this web-based interface will further
strengthen our bond with customers and enhance our customer retention programs.
Formal recognition programs are an inherent aspect of our culture. Progress
toward specific internal and external customer satisfaction goals is measured
through monthly customer care surveys. Customer care managers are paid quarterly
bonuses which comprise 25% of their annual compensation and are based on key
customer satisfaction indices.
Our focus on customer care is reflected in our low churn rate of 3%
annually for all of our customers, including our resale customers and our
network customers. Since initiation of our network services in May 1999, we have
lost only one network customer.
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<PAGE> 41
BACK OFFICE
Back office refers to the hardware and software systems that support the
primary functions of our operations, including:
- sales support;
- order entry and provisioning;
- billing; and
- customer care and trouble management.
Our goal is to have a back office that allows customers to switch service
from their current local providers to our network as easily and as quickly as
they can switch long distance providers today. Over time, we strive to have
"flow-through" provisioning capabilities, allowing services to be implemented
with limited human intervention.
We have implemented the primary elements of our back office, including
order entry, provisioning, billing and customer care. We believe we have
implemented the best application for each function. The following table
describes our key back office systems, their purpose, their status and timeline
for integration.
<TABLE>
<CAPTION>
SYSTEM PURPOSE IN-SERVICE INTEGRATION
------ ------- ---------- -----------
<S> <C> <C> <C>
Siebel Systems............ customer care 2nd Quarter 2000 2nd Quarter 2000
Wisor..................... sales support Yes 2nd Quarter 2000
Metasolv.................. provisioning Yes 1st Quarter 2000
DSET...................... communications center 1st Quarter 2000 1st Quarter 2000
connection
Saville................... billing Yes 1st Quarter 2000
e.mpower.................. extranet Yes Integrated
INM-3..................... Network Operations Center, Yes 2nd Quarter 2000
network management
Linguateq................. call record consolidation Yes 1st Quarter 2000
CHA....................... wholesale billing Yes 1st Quarter 2000
Oracle Financial.......... accounting/finance Yes 2nd Quarter 2000
Super Sleuth.............. fraud prevention Yes 1st Quarter 2000
Vitria.................... application integration 1st Quarter 2000 2nd Quarter 2000
</TABLE>
ORDER ENTRY AND PROVISIONING
Order entry involves the initial loading of customer data into our
information systems. Currently, our sales executives take orders and our
customer care and provisioning representatives load the initial customer
information into our Saville billing system and load the initial customer
information into our Metasolv provisioning system. We are in the process of
integrating our systems which will increase efficiency and reduce duplicative
data entry and error.
We use the Metasolv TBS system to manage and track the timely completion of
each step in the provisioning process. When Metasolv is coupled with
capabilities of DSET, orders can be submitted to business partners
electronically, thereby minimizing implementation time, coordination
complexities and installation costs.
In addition to the cost benefits associated with the electronic
installation of access lines and inventory management system, the Metasolv
system improves our internal processes in various other ways, including:
- directing electronic customer orders to the appropriate employee, network
component or outside vendor;
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<PAGE> 42
- tracking order progress and alerting operations personnel of steps
required to fulfill orders within standard work intervals; and
- the ability to forecast, control and communicate customer care
commitments.
The system is designed to enable the sales executive or customer care
coordinator to keep an installation on schedule and notify the customer of any
potential delays. Once an order has been completed, we update our billing system
to initiate billing of installed services.
BILLING
The Saville billing system provides our customers with a consolidated
invoice for all of our services. Customer calls generate billing records that
are automatically transmitted from the switch to the billing systems. These
records are then processed by the billing software which calculates usage costs,
integrates fixed monthly charges and assembles bills in a customer-specific
billing format.
For those customers who request electronic billing, we have the capability
to provide the invoice and call detail records on CD-ROM. This Saville system
allows us to add advanced features such as special discounts based on call
volume, or number of services used, complex local taxation and discrete billing
options by type of service ordered. We believe these features are exceptionally
important given our sophisticated client base.
CUSTOMER CARE AND TROUBLE MANAGEMENT
A fully-integrated back office system allows customer care representatives
to call up a customer while simultaneously electronically accessing all aspects
of a customer's service profile. This capability requires full system
integration accomplished through the use of Vitria, a software package that
takes two or more applications and makes them work seamlessly together and
Siebel's CRM module. Our trouble management system is integrated into the
operational support system. It enables our customer care personnel to track
customer problems proactively, assign repair work to the appropriate technical
teams and provide employees and management access to comprehensive reports on
the status of service activity.
We have entered into a service agreement with Nortel to assist us in the
continuous monitoring and operating our switch network. The network management
system is also designed to anticipate failures and intervene before many service
interruptions or service degradations occur.
CUSTOMER SELF-CARE -- E.MPOWER
In October 1999, we launched e.mpower, which includes our on-line
Internet-based bill presentment and analysis system. Currently, e.mpower enables
our customer 24 hours per day, seven days per week to order services, report
troubles, initiate and view the status of trouble tickets analyze invoice data
and access network utilization statistics such as call blocking, network
availability and traffic studies which are updated every 15 minutes.
Integration of these systems facilitates functionality, scalability,
automation and superior customer care. We are currently implementing a tailored
operational support system architecture that integrates our internal operational
processes and establishes links to our financial and accounting systems. The
system will be flexible and integrated and will provide a single interface for
all support personnel through a secure and fault-tolerant electronic network.
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<PAGE> 43
THE INTEGRATED COMMUNICATIONS NETWORK
OVERVIEW
We plan to deploy a nationwide integrated telecommunications network. We
began building our network in March 1999 and have deployed facilities in the
mid-Atlantic and northeastern regions of the United States. Building from this
established network base, we plan to expand our network nationally to include 27
markets over the next two years. We initiate service in new markets by first
deploying lower-cost data switches in new markets and adding voice switches when
justified by customer traffic.
We serve each of our markets with one or more state-of-the-art integrated
data and voice central offices. These multi-service central offices will be
equipped with both broadband data and voice switches to address current customer
requirements and provide a platform for innovative future services. We plan to
interconnect our central offices using leased fiber optic lines to minimize
expenses while optimizing reliability and service flexibility. We will continue
to use other telecommunications services providers in our operating markets and
along our transmission routes to expand our geographic coverage and provide cost
effective connections to existing and new customers.
Our approach is to deploy and own the key elements of our network necessary
to establish customer loyalty, including proprietary back office systems and
voice and data switches that can be modified for the services provided. We lease
fiber optic lines to interconnect our switches. This strategy greatly mitigates
capital risk and allows us to take advantage of falling costs of network
equipment and new technologies, including DSL.
Our smart-build strategy differs from other telecommunications services
providers in several ways because we:
- LEAD WITH DATA. We initiate service in new markets by first deploying
lower-cost data switches. This better positions us to address the
complex data needs of larger business customers and generates traffic on
our national network in targeted markets before investing significant
capital in multi-service communications equipment.
- BACK-FILL WITH VOICE. When data traffic and customer concentration
reaches an optimal level, we install multi-service communications
equipment, capable of supporting data, voice and multi-media services,
in an incremental fashion to meet our customers' growing needs.
- ENHANCE MARGINS UTILIZING DSL TECHNOLOGY. We can use to our advantage
the industry's rapid deployment of DSL technology and the effects of
recent regulatory rulings to reduce our cost of connecting customers to
our network by up to 50%.
- MINIMIZE COLLOCATION WITH TRADITIONAL TELEPHONE COMPANIES. Unlike other
smart-build competitive telecommunications providers, we do not
presently collocate our network equipment in traditional telephone
company central offices. This allows us to open new markets faster and
have greater control over service quality. In order to capitalize on a
recent regulatory ruling, we plan to establish one traditional telephone
company collocation in each market to allow us to reduce the cost of new
customer connections.
DEPLOYMENT
We plan to deploy our network in three phases:
PHASE I
Phase I of our network build-out plan includes the Boston to Washington
corridor. We have chosen this territory as the foundation of our networks in
order to use to our advantage our
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<PAGE> 44
reputation and existing relationships and capitalize on this strategic, high
volume telecommunications region.
Our Phase I markets include:
<TABLE>
<CAPTION>
DEPLOYMENT OF DEPLOYMENT OF
MARKET DATA SERVICES LOCAL SERVICES
- ------ ------------- --------------
<S> <C> <C>
Washington, DC............................... In service In service
Baltimore, MD................................ In service In service
Richmond, VA................................. In service In service
New York, NY................................. In service In service
Boston, MA................................... In service In service
Norfolk, VA.................................. In service In service
Williamsburg, VA............................. 1st Quarter 2000 1st Quarter 2000
Long Island, NY.............................. In service 2nd Quarter 2000
Newark, NJ................................... 1st Quarter 2000 1st Quarter 2000
Philadelphia, PA............................. 1st Quarter 2000 In Phase II
Providence, RI............................... 1st Quarter 2000 2nd Quarter 2000
Frederick, MD................................ 2nd Quarter 2000 2nd Quarter 2000
Roanoke, VA.................................. 1st Quarter 2000 1st Quarter 2000
</TABLE>
PHASE II
In Phase II, we plan to deploy a national backbone network, made up of
asynchronous transfer mode switches and three additional voice switches. We
believe our Phase II markets are generally among the largest 50 metropolitan
areas in the United States, or tier I markets, and contain high concentrations
of large sophisticated customers with a high density of access lines. In
addition, we believe these markets are geographically dispersed, providing the
optimal locations for originating and terminating traffic on our own network.
These markets are interconnected by existing fiber routes. We expect to complete
the build-out of Phase II by the end of 2000. Our Phase II markets include:
<TABLE>
<CAPTION>
DEPLOYMENT OF DEPLOYMENT OF
MARKET DATA SERVICES LOCAL SERVICES
- ------ ------------- --------------
<S> <C> <C>
Denver, CO................................... 2nd Quarter 2000 In Phase III
Atlanta, GA.................................. 2nd Quarter 2000 4th Quarter 2000
Los Angeles, CA.............................. 3rd Quarter 2000 In Phase III
Wilmington, DE............................... 4th Quarter 2000 4th Quarter 2000
Charlotte, NC................................ 2nd Quarter 2000 In Phase III
Pittsburgh, PA............................... 4th Quarter 2000 In Phase III
Chicago, IL.................................. 2nd Quarter 2000 In Phase III
Dallas/Ft. Worth, TX......................... 2nd Quarter 2000 In Phase III
San Jose, CA................................. 3rd Quarter 2000 In Phase III
Salt Lake City, UT........................... 4th Quarter 2000 In Phase III
Philadelphia, PA............................. In Phase I 3rd Quarter 2000
</TABLE>
PHASE III
In Phase III, we plan to further expand our geographic coverage and add
additional switches in our existing markets. In Phase III, we complement and
upgrade our Phase I and II network facilities in order to provide our full suite
of services and to more fully utilize the national
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backbone network constructed during Phases I and II. We anticipate we will
substantially complete the build-out of Phase III in the third quarter of 2002.
Our Phase III markets include:
<TABLE>
<CAPTION>
DEPLOYMENT OF DEPLOYMENT OF
MARKET DATA SERVICES LOCAL SERVICES
- ------ ------------- --------------
<S> <C> <C>
Chicago, IL.................................. In Phase II 1st Quarter 2001
Miami, FL.................................... 1st Quarter 2001 2nd Quarter 2001
Charlotte, NC................................ In Phase II 1st Quarter 2001
San Francisco, CA............................ 1st Quarter 2001 2nd Quarter 2001
Houston, TX.................................. 2nd Quarter 2001 2nd Quarter 2002
Los Angeles, CA.............................. In Phase II 3rd Quarter 2001
Denver, CO................................... In Phase II 4th Quarter 2001
Dallas/Ft. Worth, TX......................... In Phase II 1st Quarter 2002
Pittsburgh, PA............................... In Phase II 2nd Quarter 2002
Seattle, WA.................................. 1st Quarter 2002 3rd Quarter 2002
</TABLE>
NETWORK ARCHITECTURE
We have deployed, and plan to deploy, Nortel DMS-500 voice switches and
Nortel Passport data switches throughout our network. The DMS-500 voice switch
integrates local and long distance service capabilities. We chose these switches
based on their robust and completely integrated local and long distance service
capabilities, including:
- local number portability;
- emergency services;
- integrated services digital network; and
- least cost routing.
By using an integrated switching platform, we believe that we can provide
more efficient service, reduce network capital requirements and reduce operating
expenses, including:
- training and payroll;
- spare parts;
- maintenance;
- equipment space; and
- power expenses.
To complement the DMS-500, we have deployed a Tellabs Titan 5500 and 532
Digital Access Cross-connect System, or DACS, to manage all fiber optic lines.
This data and voice architecture allows us to offer integrated services not
currently offered by other competitive telecommunications providers, thereby
resulting in higher service revenue and increased customer reliance upon us as a
single source competitive telecommunications provider. Use of a DACS and an
integrated access circuit reduces our maintenance and local connection expenses.
It also improves our network monitoring capabilities, facilitates reliability
through alternate routing and provides efficiency through bandwidth
optimization.
Our strategy to target high-end users of telecommunications services and
the smart-build network configuration we have deployed to serve these customers
provides the opportunity for us to significantly lower our costs to connect to
our customers. Our use of data switches provides the ability to integrate
multiple services over a single customer connection. Further, this technology
enables us to monitor individual customers' capacity needs, in real-time, and
allocate
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the appropriate bandwidth on demand. This capability allows us to offer
customers more billable services over fewer network connections than our
competitors.
Additionally, we can lower our costs of connecting customers to our network
through the use and exploitation of DSL and enhanced extended links dedicated
circuits. DSL can provide a T-1 line equivalent connection between the customer
and the Net2000 network at savings of up to 50% off traditional T-1 line
connections. Recent regulatory rulings have created the opportunity to deploy
enhanced extended links dedicated circuits between our network and our customers
in lieu of traditional T-1 line connections, which we believe may reduce our
cost of these connections from 20% to 50%.
To address the growing need for data telecommunications services, we
continue to deploy the latest generation Nortel Passport data switches. These
switches are based on asynchronous transfer mode transport technology. We have
deployed data switches in our central offices and at key transmission points of
presence, or POPs, within and in our future target markets. This allows us to:
- increase the proportion of traffic carried on our network;
- provide a foundation for our integrated data network;
- enhance network control; and
- simplify the provisioning effort.
As part of our smart-build strategy, we deploy data switches in
multi-service communications centers of other service providers, on a
collocation basis. This allows us to enter a new market and provide data
services and long distance voice services within a few months.
We believe that the traditional voice networks of other telecommunications
providers will be required to change significantly over the next several years.
Our deployment of the Nortel Passport equipment may reduce the risk of network
obsolescence and positions us to transition our traditional voice network to our
data network in response to technology advances. This transition will enable us
to offer more advanced services while further reducing network costs. We have
agreements with Nortel to credit and replace any network components that need to
be upgraded.
COMPETITION
We operate in the highly competitive telecommunications services industry.
We do not have a significant market share in any segment of the market, and many
of our existing and potential competitors have financial resources significantly
greater than our own. We believe that the traditional distinctions between the
local, long distance, data and Internet access markets are eroding.
Competition for our products and services is based on price, quality,
reputation, geographic scope, name recognition, network reliability, service
features, billing services, perceived quality and responsiveness to customers'
needs. Implementation of the Telecommunications Act and the related trend
towards business combinations and alliances in the telecommunications industry
may create significant new competitors for us. The Telecommunications Act was
designed to eliminate most barriers to local competition and to permit the
traditional local telephone companies, if they demonstrate compliance with
certain pro-competitive conditions, to provide in-region traditional long
distance services.
Our primary competitors in local service markets are the traditional
telephone companies which provide local telephone services to most telephone
subscribers within their respective service areas. These providers have
long-standing relationships with customers and regulatory authorities at the
federal and state levels. In addition, they have existing fiber optic networks
and
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<PAGE> 47
switches. If future regulatory or court decisions afford traditional telephone
companies increased rates for access or interconnection services, greater
pricing flexibility, the ability to refuse to offer particular services or
network elements on an unbundled basis, or other regulatory relief, such
decisions could have a material adverse effect on us.
In addition, AT&T and MCIWorldCom, the two largest long distance carriers
in the United States, each offer local communications services in major U.S.
markets using their own facilities or by resale of other providers' services.
New competitive telecommunication providers, cable television companies,
electric utilities, microwave providers, wireless telephone system operators and
large customers who build private networks also seek to compete in the local
services market. These entities, upon entering into appropriate interconnection
agreements or resale agreements with the traditional telephone companies, may
offer single-source local, long distance and Internet access services similar to
those that we offer or propose to offer. Today, our most typical competitors in
our target markets are the traditional telephone companies, AT&T and
MCIWorldCom.
Significant competition in the long distance market is expected to be
provided by the traditional telephone companies when permitted under government
regulation. Prior to enactment of the Telecommunications Act, a federal court
order known as the Modified Final Judgment prohibited regional Bell operating
companies from providing long distance service that originated, or, in certain
cases, terminated, in one of its in-region states, with several limited
exceptions. The prohibition against offering in-region local services imposed on
the regional Bell operating companies by the Modified Final Judgment will be
lifted for each affected company if and when it has satisfied certain statutory
conditions specified in the Telecommunications Act. The process for
demonstrating compliance with the statutory fourteen point checklist of
pro-competitive actions includes approval by the relevant state regulatory
authority and the FCC. Once the regional Bell operating companies are allowed to
offer widespread in-region traditional long distance services, both they and the
largest long distance providers will be in a position to offer single-source
local and long distance services. Our success will depend upon our ability to
provide high-quality services at prices generally competitive with, or lower
than, those charged by our competitors.
Additional pricing pressure may come from telecommunications services
providers providing services through Internet Protocol transport, a
data-switched technology that currently can be used to provide data and voice
services at a cost that may be below that of traditional telephone-switched
telecommunications services. Although this service currently is not regarded as
comparable to traditional voice telecommunications service, it could potentially
be used as a substitute for traditional voice service and put pricing pressure
on rates. Any reduction in prices may have a material adverse affect on our
results of operations.
We also will face competition from fixed and mobile wireless services
providers. The FCC has authorized cellular, personal communications services and
other providers to offer wireless services to both fixed and mobile locations.
These providers can offer wireless local loop service and other services to
fixed locations, such as office and apartment buildings, in direct competition
with us and existing providers of traditional wireline telephone service.
In addition, FCC rules went into effect in February 1998 that will make it
substantially easier for many non-U.S. telecommunications companies to enter the
U.S. market, thus potentially further increasing the number of competitors.
The market for data telecommunications and Internet access services also is
extremely competitive. Existing telecommunications companies, cable companies,
wireless telecommunications companies and new companies such as Internet service
providers compete to offer data and Internet services. There are no substantial
barriers to entry, and we expect that competition will intensify in the future.
Our success in selling these services will depend heavily upon our ability to
provide high-quality Internet access connections at competitive prices.
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EMPLOYEES
As of December 31, 1999, we had 485 full-time employees. We also hire
temporary employees and independent contractors as needed. In connection with
our growth strategy, we anticipate hiring a significant number of additional
personnel in sales and other areas of our operations by year-end 2000. Our
employees are not unionized, and we believe our relations with our employees are
good. Our success will continue to depend in part on our ability to attract and
retain highly qualified employees.
PROPERTIES
Our corporate headquarters is located in a 126,000-square foot facility
which we lease in Herndon, Virginia. The headquarters facility also houses our
customer care operations, our network operations center and certain network
facilities. We lease additional sales offices and switching facilities. The
aggregate amount we paid under our leases for the nine months ended September
30, 1999 was $1.5 million. Although our facilities are adequate at this time, we
will need to lease additional facilities, including additional sales offices and
switching facilities, as a result of anticipated growth.
LEGAL PROCEEDINGS
From time to time, we are a party to routine litigation and proceedings in
the ordinary course of business. We are not aware of any current or pending
litigation to which we are or may be a party that we believe could materially
and adversely affect our results of operations or financial condition.
GOVERNMENT REGULATION
OVERVIEW
Our telecommunications services are subject to regulation by federal, state
and local government agencies. Generally Internet and certain data services are
not directly regulated, although the underlying telecommunications services may
be regulated in certain instances. We hold various federal, state and local
regulatory authorizations for our regulated service offerings. The FCC has
jurisdiction over our facilities and services to the extent those facilities are
used in the provision of interstate or international telecommunications. State
regulatory commissions also have jurisdiction over our facilities and services
to the extent they are used in intrastate telecommunications. Municipalities and
other local government agencies may require telecommunications services
providers to obtain licenses or franchises regulating use of public
rights-of-way necessary to install and operate their networks. The networks also
are subject to certain other local regulations such as building codes and
generally applicable public safety and welfare requirements. Many of the
regulations issued by these regulatory bodies may change and are the subject of
various judicial proceedings, legislative hearings and administrative proposals.
We cannot predict what impact, if any, these proceedings or changes will have on
our business or results of operations.
FEDERAL REGULATION
The FCC regulates us as a non-dominant common carrier, or one that is not
considered to be dominant over other service providers in the relevant product
or geographic markets in which it operates. Non-dominant carriers are subject to
lesser regulation than dominant carriers but remain subject to the general
requirements that they offer just and reasonable rates and terms of service and
do not unreasonably discriminate in the provision of services. We have obtained
authority from the FCC to provide domestic interstate long distance services and
international services between the United States and foreign countries and have
filed the required tariffs.
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While we believe we are in compliance with applicable laws and regulations we
cannot assure you that the FCC or third parties will not raise issues with
regard to our compliance.
THE TELECOMMUNICATIONS ACT
In February 1996, the Telecommunications Act was passed by the United
States Congress and signed into law by President Clinton. This comprehensive
telecommunications legislation was designed to increase competition in the
long-distance and local telecommunications industries. The Telecommunications
Act imposes a variety of duties on competitive telecommunications providers to
facilitate competition in the provision of local telecommunications and access
services. Like all local telecommunications carriers, where we provide local
services, we are required to:
- interconnect our networks with those of other telecommunications
carriers;
- originate calls to and terminate calls from competing providers on a
reciprocal basis;
- permit resale of our services;
- permit users to retain their telephone numbers when changing providers;
and
- provide competing providers with access to poles, ducts, conduits and
rights-of-way, if any.
Traditional telephone companies, such as the regional Bell operating
companies, are subject to requirements in addition to these, including the duty
to:
- undertake additional obligations applicable to the interconnection of
their networks with those of competitors;
- permit collocation of competitors' equipment at their central offices;
- provide access to individual network elements and "unbundled elements,"
including network facilities, features and capabilities, on
non-discriminatory and cost-based terms; and
- offer their retail services for resale at wholesale rates.
The Telecommunications Act also eliminates certain pre-existing
prohibitions on the provision of traditional long distance services by the
regional Bell operating companies and GTE on a phased-in basis. Regional Bell
operating companies currently are permitted to provide long distance service
outside those states in which they provide local telecommunications service. In
order to provide this category of long distance services, the regional Bell
operating companies must receive all requisite state or federal regulatory
approvals customary to the provision of long distance services. Regional Bell
operating companies will be permitted to provide traditional long distance
service within the regions in which they also provide local telecommunications
service upon demonstrating to the FCC, with input from state regulatory agencies
and the Department of Justice, that they have complied with a statutory
checklist of requirements intended to open local telephone markets to
competition. GTE and other traditional telephone companies are not limited by
this regional restriction. To date only Bell Atlantic has been granted approval
to provide traditional long distance services and that is restricted to long
distance calls originating in New York. Entry of Bell Atlantic, and additional
regional Bell operating companies, into the long distance business could result
in substantial competition to our services and may have a material adverse
effect on us and our customers.
The FCC is charged with establishing national rules implementing certain
portions of the Telecommunications Act. In August 1996, the FCC released an
order adopting an extensive set of regulations governing network
interconnection, network unbundling and resale of traditional telephone company
services, under the Telecommunications Act. In July 1997, the United States
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<PAGE> 50
Court of Appeals for the Eighth Circuit issued a decision vacating substantial
portions of these rules, principally on the ground that the FCC had improperly
intruded into matters reserved for state jurisdiction. In January 1999, the
United States Supreme Court reversed many aspects of the Eighth Circuit's
decision, concluding that the FCC has jurisdiction to implement the local
competition provisions of the Telecommunications Act. In so doing, the Supreme
Court found that the FCC has authority to establish pricing guidelines
applicable to the provision of unbundled network elements and the resale of
traditional telephone company services, to prevent traditional telephone
companies from disaggregating existing combinations of network elements, and to
establish rules enabling competitors to select all or portions of any existing
traditional telephone company interconnection agreements for use in their own
interconnection agreements with traditional telephone companies. The Supreme
Court, however, did not evaluate the specific pricing methodology adopted by the
FCC and has remanded the case to the Eighth Circuit for further consideration.
While the Supreme Court resolved many issues, including the FCC's jurisdictional
authority, other issues remain subject to further consideration by the courts
and the FCC.
Although most of these FCC rules were upheld by the Supreme Court, the
Court found that the FCC had not adequately considered certain statutory
criteria for requiring traditional telephone companies to make unbundled network
elements available to competitive telecommunications providers. The FCC then
conducted new proceedings to reexamine which unbundled network elements
traditional telephone companies must provide. On November 5, 1999, the FCC
released an order in which it required that traditional telephone companies make
available most, but not all, of the network elements specified in its initial
order, as well as certain new network elements not included on the original
list. The FCC also clarified the obligation of traditional telephone companies
to provide certain combinations of network elements. We expect interested
parties to seek reconsideration or appeal of the FCC's order.
In the first half of 1998, four regional Bell operating companies
petitioned the FCC to be relieved of certain regulatory requirements in
connection with their provision of advanced telecommunications services.
Advanced telecommunications services are wireline, broadband telecommunications
services, as opposed to traditional voice services, and are widely used for
Internet access, often relying on DSL technology and data-switched technology.
In response, in August 1998, the FCC issued an order and notice which clarified
its views on the applicability to advanced services of existing statutory
requirements in the Telecommunications Act relating to network interconnection
and unbundling. The FCC also solicited public comments on a wide variety of
issues associated with the provision of advanced services by wireline carriers.
In March 1999, the FCC adopted a further order strengthening the rights of
competitive telecommunications providers to obtain physical collocation for
purposes of interconnecting with traditional telephone company networks, as well
as requiring that traditional telephone companies permit competitive
telecommunications providers to collocate equipment used for interconnection
and/or access to unbundled network elements even if such equipment includes
certain switching or enhanced services functions. The FCC also adopted rules
designed to limit traditional telephone companies' ability to deny competitive
telecommunications providers the ability to deploy transmission hardware in
collocation space by purporting that the equipment will cause electrical
interference with other wires, and it proposed rules making these requirements
more specific. In the recent proceeding addressing unbundled network elements,
however, the FCC declined to require traditional telephone companies to provide
competitive telecommunications providers with unbundled access to data switching
services, except in limited circumstances. The FCC also has not yet determined
whether it will permit traditional telephone companies to deploy advanced
telecommunications services through a separate affiliate, which would not be
regulated as a traditional telephone company and therefore would not be subject
to the Telecommunications Act's unbundling and resale provisions. The FCC also
has pending requests by certain traditional telephone companies for pricing
flexibility for their provision of data services in certain
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markets. Moreover, in November 1998, the FCC ruled that DSL services used to
provide dedicated access to interstate services, including Internet access, need
not be resold to competitive telecommunications providers at wholesale rates.
The FCC's decisions on these matters are currently subject or expected to be
subject to judicial review.
As noted above, a regional Bell operating company seeking to provide
traditional long distance services within its local operating region must first
comply with certain market opening conditions set forth in the
Telecommunications Act as well as receive approval from the FCC. On December 22,
1999, the FCC approved an application filed by Bell Atlantic seeking authority
to begin providing long distance services to customers located in the State of
New York, where it also provides local service. This action represents the first
approval by the FCC of a regional Bell operating company request to provide long
distance services to customers located in their local operating region. The
FCC's approval of Bell Atlantic's application to provide such long distance
services is likely to strengthen its competitive position in New York
substantially. In addition, we anticipate that Bell Atlantic will soon initiate
similar proceedings to obtain such long distance service authority in other
states in its fourteen state operating region. For example, Bell Atlantic
already has begun the necessary regulatory review process in the Commonwealth of
Massachusetts. In addition, on January 10, 2000, Southwestern Bell filed an
application with the FCC seeking permission to provide long distance services to
customers in Texas. We expect other regional Bell operating companies to seek
similar relief from the traditional long distance service ban as it applies to
them.
When the FCC permits the regional Bell operating companies to provide
traditional long distance service in their local service regions, they will be
able to offer integrated local and long distance services and may enjoy a
significant competitive advantage. However, the Telecommunications Act imposes
restrictions on the regional Bell operating companies after they are permitted
to enter the long distance services market in their local service regions. Among
other requirements, for the first three years, unless this time period is
extended by the FCC, the regional Bell operating companies can provide these
traditional long-distance services within their local operating regions only
through separate subsidiaries with separate books and records, financing,
management and employees. In addition, transactions between regional Bell
operating company affiliates and these subsidiaries must be conducted on a
non-discriminatory basis.
ACCESS REGULATION
The FCC regulates the interstate access rates charged by traditional
telephone companies for the origination and termination of interstate long
distance traffic. Those access rates make up a significant portion of the cost
of providing these long distance services. Over the past few years, the FCC has
implemented changes in interstate access rules that result in the restructuring
of the access charge system and changes in access charge rate levels. On remand
from an appeals court, the FCC is conducting further proceedings to explain and
refine its recent reforms affecting access charge rate levels. The FCC is
considering several proposals to further reform access charge rate structures.
These and related actions may change access rates. If access rates are reduced,
access revenues of all local telecommunications carriers, including us, could be
reduced, and the costs to traditional telephone companies and long distance
carriers to provide long distance services also could be reduced significantly.
The impact of these new changes will not be known until they are fully
implemented.
The FCC has also raised the issue of whether it should begin to regulate
the access charges imposed by competitive telecommunications providers.
Currently, competitive telecommunications providers are free to charge access
rates at any levels they deem appropriate. The current proceeding seeks comment
from the industry on whether competitive telecommunications providers should be
required to cost-justify the access charges they impose on long distance
carriers or whether such rates should be limited to a range of "reasonable"
charges. A decision
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by the FCC to regulate competitive telecommunications providers' access charges
could result in the reduction of those charges for all competitive
telecommunications providers.
Over the past few years, the FCC has granted traditional telephone
companies significant flexibility in pricing their interstate special and
switched access services. We anticipate that this pricing flexibility will
result in traditional telephone companies lowering their prices in high traffic
density areas, the probable areas of competition with us. We also anticipate
that the FCC will grant traditional telephone companies increasing pricing
flexibility as the number of potential competitors increases in each of these
markets. In August 1999, the FCC released an order that granted substantial
additional pricing flexibility to traditional telephone companies for certain
interstate services. Among other things, the FCC granted immediate pricing
flexibility to many traditional telephone companies in the form of streamlined
introduction of new services, the ability to change rates for certain interstate
services based on geographic location, and removal, after certain local toll
dialing restrictions are lifted, of certain interstate long distance services
from restrictive pricing regulation. The FCC also established a framework for
granting many traditional telephone companies greater flexibility in the pricing
of all interstate access services once they satisfy certain prescribed
competitive criteria. The FCC also invited public comment on proposals for yet
further traditional telephone company pricing flexibility.
UNIVERSAL SERVICE
In 1997, the FCC established a significantly expanded universal service
regime to subsidize the cost of telecommunications services to high cost areas,
and to low-income customers and qualifying schools, libraries and rural health
care providers. Providers of telecommunications services, like us, as well as
certain other entities, must pay for these programs. Our share of the payments
into these subsidy funds will be based on our share of certain defined
telecommunications end-user revenues. Currently, the FCC is assessing these
payments on the basis of a telecommunications services provider's interstate and
international revenue for the previous year. Various states are also in the
process of implementing their own universal service programs. We are currently
unable to quantify the amount of subsidy payments we will be required to make in
the future or the effect that these requirement payments will have on our
financial condition. Moreover, the FCC's universal service rules remain subject
to change, which could increase our costs.
DETARIFFING
In November 1996, the FCC issued an order that required non-dominant, long
distance carriers, like us, to cease filing tariffs for our domestic long
distance services. Tariffing is a traditional requirement of telephone companies
whereby such companies publish for public inspection at state and federal
regulatory agencies all terms, conditions, pricing, and available services
governing the sale of all such services to the public. Traditional long distance
service tariffs are filed with the FCC and tariffs for local services are filed
with state regulatory commissions. The FCC's order required mandatory
detariffing for long distance services and gave interstate long distance service
providers nine months to withdraw federal tariffs and move to contractual
relationships with their customers. This order subsequently was stayed by a
federal appeals court, and it is unclear at this time whether or when the
detariffing order will be implemented. In June 1997, the FCC issued another
order stating that non-dominant local services providers may withdraw their
tariffs for interstate access services provided to long distance carriers. The
FCC continues to require that services providers obtain authority to provide
service between the United States and foreign points and file tariffs for
international service.
In March 1999, the FCC adopted further rules that, while still maintaining
mandatory detariffing, required long distance carriers to make specific public
disclosures on the services providers' Internet websites of their rates, terms
and conditions for domestic interstate services.
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The effective date of these rules also is delayed until a court decision is
rendered on the appeal of the FCC's detariffing order. If the FCC's orders
become effective, non-dominant interstate services providers will no longer be
able to rely on the filing of tariffs with the FCC as a means of providing
notice to customers of prices, terms and conditions under which they offer their
domestic interstate services, and will have to rely more heavily on individually
negotiated agreements with end-users.
RECIPROCAL COMPENSATION
Recently, the FCC has determined that both dedicated access and dial-up
calls from a customer to an Internet service provider are primarily interstate
in nature and therefore are to be considered interstate calls, subject to the
FCC's jurisdiction. The FCC has initiated a proceeding to determine the effect
that this regulatory classification will have on the obligation of a service
provider to pay reciprocal compensation for dial-up calls to Internet service
providers that originate on one service provider's network and terminate on
another service provider's network. Currently, the FCC has permitted existing
reciprocal compensation arrangements between service providers, as set forth in
interconnection agreements and approved by state regulatory commissions, to
remain intact. The FCC is currently determining whether a new compensation
mechanism should be implemented. A decision which invalidates current reciprocal
compensation arrangements could result in the reduction, or elimination, of
revenue we receive from reciprocal compensation payments for traffic terminated
over our network to Internet service providers. In addition, in various
contexts, certain traditional telephone companies have asked the FCC to rule
that certain calls made over the Internet are subject to regulation as
telecommunications services including the assessment of interstate switched
access charges and universal service fund assessments. Although the FCC has
suggested that Internet-based telephone-to-telephone calls may be considered
telecommunications services, it has not reached a final decision on that issue.
CUSTOMER PRIVACY
The Communications Act of 1934 and FCC rules protect the privacy of certain
information that a telecommunications carrier such as us acquires by providing
telecommunications services to such customers. Such protected information known
as Customer Proprietary Network Information, includes information related to the
quantity technological configuration, type, destination and amount of use of a
customer. Under the FCC's rules, a carrier may not use this information acquired
through one of its offerings of telecommunications services to market certain
other services without the approval of the affected customers. The United States
Court of Appeals for the Tenth Circuit, however, recently overturned the FCC's
rules regarding the use and protection of this information. The FCC relaxed
these rules recently, but may seek review of the Tenth Circuit's decision by the
U.S. Supreme Court.
STATE REGULATION
The Telecommunications Act preempts state and local statutes and
regulations that would tend to prohibit the provision of competitive
telecommunications services. As a result, we will be free to provide the full
range of local, long distance and data services in all states in which we
currently operate, and in any states into which we may wish to expand. While
this action greatly increases our potential for growth, it also increases the
amount of competition to which we may be subject.
Because we provide intrastate common carrier services, we are subject to
various state laws and regulations. Most state public utility and public service
commissions require some form of certification or registration. We must acquire
this authority before commencing service. In most states, we are also required
to file tariffs or price lists setting forth the terms, conditions and prices
for services that are classified as intrastate. We are required to update or
amend these
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tariffs when we adjust our rates or add new products and are subject to various
reporting and record-keeping requirements in these states.
Many states also require prior approval for transfers of control of
certified providers, corporate reorganizations, acquisitions of
telecommunications operations, assignment of carrier assets, carrier stock
offerings and incurrence of significant debt obligations.
States generally retain the right to sanction a service provider or to
revoke certification if a service provider violates applicable laws or
regulations. If any regulatory agency were to conclude that we are or were
providing intrastate services without the appropriate authority or in violation
of any regulation, the agency could initiate enforcement actions, which could
include the imposition of fines, a requirement to disgorge revenues or the
refusal to grant the regulatory authority necessary for the future provision of
intrastate telecommunications services. We are authorized to provide intrastate
long distance services in all states except Alaska and are in the process of
obtaining intrastate long distance authority in that state. We have authority to
provide competitive local telecommunications services in Connecticut, Delaware,
the District of Columbia, Massachusetts, New Hampshire, New Jersey, New York,
North Carolina, Pennsylvania, Rhode Island, Virginia and West Virginia. We have
applications pending to provide competitive local telecommunications services in
other states, including Maryland and Maine. There can be no assurance that we
will receive the authorizations we seek currently or in the future.
LOCAL INTERCONNECTION
The Telecommunications Act imposes a duty upon all traditional telephone
companies to negotiate in good faith with potential competitive
telecommunications providers to provide interconnection to their networks,
exchange local traffic, make unbundled network elements available and permit
resale of most local services. In the event that negotiations do not succeed, we
have a right to seek arbitration with the state regulatory authority of any
unresolved issues. Arbitration decisions involving interconnection arrangements
in several states have been challenged and appealed to federal courts. We may
experience difficulty in obtaining timely traditional telephone company
implementation of local interconnection agreements, and we can provide no
assurance we will offer local services in these areas in accordance with our
projected schedule, if at all. We have entered into interconnection agreements
with Bell Atlantic in New York, Maryland, Virginia, the District of Columbia,
Pennsylvania, Massachusetts, New Jersey, and Rhode Island, and with GTE in
Virginia. We have begun to negotiate similar agreements in the other states
where we have obtained status as a competitive telecommunications provider.
Moreover, a number of our interconnection agreements will expire at various
times over the next six to 36 months, after which time, we will be required to
renegotiate each such agreement. It is uncertain how successful we will be in
negotiating the terms critical to our provision of local data and voice services
and we may be forced to arbitrate certain provisions of such agreements.
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<PAGE> 55
MANAGEMENT
OFFICERS AND DIRECTORS
Our officers and directors, and their ages as of December 31, 1999 are
listed below:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<S> <C> <C>
Clayton A. Thomas, Jr. .............. 37 Chairman of the Board and Chief Executive
Officer
Clyde Heintzelman.................... 61 President and Director
Mark A. Mendes....................... 37 Executive Vice President and Chief Operating
Officer and Secretary
Donald E. Clarke..................... 40 Executive Vice President and Chief Financial
Officer and Treasurer
Bruce W. Bednarski................... 41 Senior Vice President, Technology and Services
Peter B. Callowhill.................. 49 Senior Vice President, Sales -- North and
Director
Jeffrey E. Campbell.................. 37 Senior Vice President, Business Operations
Kathleen A. Dickerson................ 50 Vice President, Human Resources and
Administration
Stavros Hilaris...................... 41 Vice President, Network Engineering and
Planning
David Nelson......................... 40 Vice President, Network and Customer
Operations
Michael G. St. Jacques............... 53 Vice President, Information Technology
Lee Weiner........................... 42 Senior Vice President and General Counsel
Stephen D. Wright.................... 35 Vice President, Sales -- South
Eric Geis(1)(2)...................... 53 Director
Reid Miles(1)(2)..................... 37 Director
Mitchell Reese(2).................... 40 Director
</TABLE>
- ---------------
(1) Audit Committee
(2) Compensation Committee
CLAYTON A. THOMAS, JR., a co-founder, has been our chief executive officer
and a director since our inception in August 1993. From August 1993 to November
1999, Mr. Thomas was also our president. In May 1995, Mr. Thomas founded N2N
Communications, an Internet service provider, which was subsequently sold in
1996. From October 1986 to July 1993, he served in various sales and marketing
roles with Bell Atlantic Corporation. Mr. Thomas serves on the board of
directors of the Northern Virginia Technology Council.
CLYDE HEINTZELMAN has been our president since November 1999 and a director
since March 1997. From December 1998 to November 1999, Mr. Heintzelman served as
president and chief executive officer of SAVVIS Communications Corporation, a
national Tier 1 Internet service provider. From May 1995 to November 1997, he
was president and chief operating officer of DIGEX Incorporated, an Internet
service provider providing service to markets among the 50 largest metropolitan
areas in the U.S. In mid-1997, DIGEX was sold to Intermedia Communications,
Inc., a national CLEC, and from November 1997 to November 1998, he served as a
retained business consultant to Intermedia. In addition, from 1964 to 1992, Mr.
Heintzelman was in several executive capacities with Bell Atlantic Corporation
and its predecessor companies (AT&T). Mr. Heintzelman serves on the boards of
directors of Sonoma Systems Inc. and Optelecom, Inc., a fiber optic device
company, and SAVVIS Communications.
MARK A. MENDES has been our executive vice president and chief operating
officer since October 1997. From March 1997 to October 1997, Mr. Mendes was
chief operating officer of US
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<PAGE> 56
WATS, Inc., a public long distance carrier. From March 1995 to March 1997, he
was vice president of service and technology at Access Teleconferencing
International, Inc., now Vialog, Inc., a conference call service provider. From
July 1993 to March 1995, Mr. Mendes was vice president, engineering and
operations of InterNet, a prepaid calling card carrier. From December 1992 to
July 1993, he was a director of network development for FiberNet Inc., a
competitive access provider. Mr. Mendes held various operating positions at
Frontier Corporation from 1985 to 1992.
DONALD E. CLARKE has been our executive vice president and chief financial
officer since December 1997. From August 1994 to April 1997, Mr. Clarke was
chief financial officer, and from September 1995 to April 1997 was president, of
Plexsys International Corp., a provider of wireless infrastructure equipment
principally to developing countries. From September 1986 to July 1994, he served
in various executive positions including vice president, chief financial
officer, controller and assistant controller at Intelicom Solutions Corporation,
affiliated with CSC Intelicom, Inc., a worldwide provider of specialized
software solutions to telecommunications services providers.
BRUCE W. BEDNARSKI, a co-founder, has been our senior vice president,
technology and services since our inception in August 1993. From May 1990 to
September 1993, he was a third level systems engineer for the Bell Atlantic
Corporation. From April 1987 to April 1990, Mr. Bednarski was a systems engineer
for the United States Senate where he managed the Senate's telecommunications
infrastructure. From March 1984 to March 1987, he was a second level technical
support engineer for Northern Telecom Inc. where he installed and engineered
central office switching platforms.
PETER B. CALLOWHILL, a co-founder and director, has been our senior vice
president, sales -- north since August 1997. From August 1993 to June 1997, Mr.
Callowhill was our vice president, marketing. In May 1995, Mr. Callowhill
co-founded N2N Communications, an Internet service provider, with Mr. Thomas.
Mr. Callowhill spent 11 years at Northern Telecom Inc. and served in various
capacities, including premier account manager and account executive.
JEFFREY E. CAMPBELL has been our senior vice president, business operations
since September 1999. From March 1999 to September 1999, Mr. Campbell was our
vice president, network operations, and from July 1998 to March 1999, he was
vice president, network implementation. From December 1996 to July 1998, he was
regional director of operations at Frontier Cellular, a wireless carrier
company. From February 1991 to September 1996, Mr. Campbell held several
positions at MFS Communications Company, Inc., including vice president of
upstate New York, vice president of sales and regional director operations.
KATHLEEN A. DICKERSON has been our vice president, human resources and
administration since June 1998. From April 1997 to April 1998, Ms. Dickerson was
vice president of administration for MA BioServices, Inc., a biotech testing
company. From May 1995 to April 1997, Ms. Dickerson was vice president of
administration for IGEN International, Inc., a biotech research and development
company, and from July 1986 to May 1995, served in various capacities, including
director of training and development at Marriott International, Inc.
STAVROS HILARIS has been our vice president, network engineering and
planning since May 1999. Mr. Hilaris held several positions at Teleglobe
International Corporation, a global telecommunications services provider,
including vice president, access network, USA and Americas from January 1999 to
May 1999, and vice president, network engineering and operations from April 1995
to January 1999. From April 1988 to April 1995, he held several positions at
Worldcom, Inc., including director of engineering, vice president of earth
station engineering and vice president of engineering planning.
DAVID NELSON has been our vice president, network and customer operations
since October 1999. Mr. Nelson also served as our vice president, customer
service and programming
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<PAGE> 57
from May 1998 to October 1999. From October 1993 to May 1998, he was vice
president, customer service and operations at Loral Orion, Inc., a satellite
owner, operator and provider of private multi-media networks. From June 1989 to
October 1998, Mr. Nelson held several positions in operations, sales and
marketing at Northern Telecom Inc., including director of operations, northern
Europe and director of sales, Norway.
MICHAEL G. ST. JACQUES has been our vice president, information technology
since August 1999. From August 1997 to February 1999, he was chief architect and
senior director of operations at Intermedia Communications, Inc., a
telecommunications services providers, where he was responsible for system
architecture, data management and operations. From December 1986 to August 1997,
Mr. St. Jacques served in various capacities, including technical contributor,
project manager and director at GTE Data Services Incorporated.
LEE WEINER has been our senior vice president and general counsel since
October 1999. From June 1998 to June 1999, Mr. Weiner served as vice president
and acting general counsel, and senior associate general counsel and assistant
secretary for Qwest Communications International Inc. after its merger with LCI
International, Inc. in June 1998. From September 1994 to June 1998, he served as
vice president and general counsel at LCI International, Inc. Mr. Weiner has
also held several managerial positions at MCI Telecommunications Corporation,
including director of legal affairs for MCI Business Services Division.
STEPHEN D. WRIGHT has been our vice president, sales -- south since August
1999. From August 1998 to August 1999, Mr. Wright was our branch sales director
in Richmond. From July 1995 to August 1998, he was business sales manager, and
from June 1991 to July 1995 was an account executive, at GTE Wireless
Incorporated.
ERIC GEIS has been a director since March 1997. In March 1997, Mr. Geis was
a founder, and has since served as a senior officer of Rhythms NetConnections
Inc., a data service carrier providing dedicated high-speed and high performance
data networking solutions, primarily using digital subscriber line technology.
At Rhythms, Mr. Geis has been vice president national deployment and ILEC
management from January 1998 to the present, and vice president and general
manager from June 1997 to December 1997. From December 1997 to the present, he
has also been secretary and treasurer of ACI Corp., now Rhythms Links Inc., a
wholly-owned subsidiary of Rhythms. From December 1995 to March 1997, Mr. Geis
was director of sales for GRC International, Inc., a seller of data networking
software, and from July 1991 to December 1995, chief executive officer and a
director of Quintessential Solutions, Inc., a provider of telecommunications
pricing and optimization software applications.
REID MILES has been a director since November 1997. From January 1996 to
the present, Mr. Miles has been a founder and managing director of Blue Water
Capital LLC, an expansion stage venture capital firm focused on investments in
the information technology arena. From April 1994 to January 1996, he was vice
president of marketing and business development of Advance, Inc.
MITCHELL REESE has been a director since May 1998. Mr. Reese has been a
managing director of The Carlyle Group since September 1997. From August 1994 to
August 1997, he was the president of the venture capital division at Morgan
Keegan, Inc.
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<PAGE> 58
CLASSIFIED BOARD OF DIRECTORS
Our certificate of incorporation and bylaws provide for a classified board
of directors consisting of three classes of directors, each serving staggered
three-year terms. As a result, a portion of our board of directors will be
elected each year. To implement the classified structure, two of the nominees to
the board have been elected to one-year terms, two have been elected to two-year
terms and two have been elected to three-year terms. Thereafter, directors are
elected for three-year terms. Messrs. Callowhill and Thomas are class I
directors with terms expiring at the 2000 annual meeting of stockholders,
Messrs. Miles and Reese are class II directors, with terms expiring at the 2001
annual meeting of stockholders, and Messrs. Geis and Heintzelman are class III
directors, with terms expiring at the 2002 annual meeting of stockholders.
BOARD COMMITTEES
Our bylaws provide that our board of directors may designate one or more
board committees. We currently have an audit committee and a compensation
committee.
Our audit committee, currently comprised of Messrs. Geis and Miles:
- recommends to our board of directors the independent auditors to conduct
the annual audit of our books and records;
- reviews the proposed scope and results of the audit;
- approves the audit fees to be paid;
- reviews accounting and financial controls with the independent public
accountants and our financial and accounting staff; and
- reviews and approves transactions between us and our directors, officers
and affiliates.
Our compensation committee, currently comprised of Messrs. Geis, Miles and
Reese:
- reviews and recommends the compensation arrangements for management,
including the compensation for our president and chief executive officer;
- establishes and reviews general compensation policies with the objective
to attract and retain superior talent, to reward individual performance
and to achieve our financial goals; and
- administers our stock option plans.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
From January 1999 to November 1999, members of our compensation committee
were Messrs. Thomas, Heintzelman, Miles and Reese. Mr. Thomas was our president
and chief executive officer from January 1999 to November 1999. Mr. Heintzelman
has been our president since November 1999. From November 1999 to the present,
members of our compensation committee are Messrs. Geis, Miles and Reese. None of
our executive officers has served as a member of the compensation committee (or
other committee serving an equivalent function) of any other entity, whose
executive officers served as a director of our company or member of our
compensation committee.
COMPENSATION OF DIRECTORS
Since his election to our board, Mr. Geis has received $600 per board
meeting and Mr. Heintzelman, prior to becoming an employee, also received $600
per board meeting and no other directors received compensation for serving as
directors. We reimburse our directors for reasonable expenses they incur to
attend board and committee meetings.
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<PAGE> 59
Our non-employee directors are eligible to receive grants of options to
acquire our common stock pursuant to our 1997 Equity Incentive Plan and our 1999
Stock Incentive Plan. In December 1997 and October 1998, we granted options to
Mr. Geis to purchase 40,000 and 10,000 shares of our common stock, respectively,
at $0.14 and $3.40 per share, the fair value at each grant date. In November
1999, Mr. Geis received an additional option to purchase 12,500 shares of common
stock at an exercise price of $5.60 per share. In December 1997 and October
1998, we granted options to Mr. Heintzelman to purchase 40,000 and 10,000 shares
of our common stock, respectively, at $0.14 and $3.40 per share, the fair value
at each grant date. See "1997 Equity Incentive Plan" and "1999 Stock Incentive
Plan."
EXECUTIVE COMPENSATION
The following table summarizes the compensation paid to our chief executive
officer and the other four most highly paid executive officers whose total
salary and bonus exceed $100,000 for the year ended December 31, 1999, whom we
refer to as our named executive officers:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION ------------------
----------------------------- SECURITIES
SALARY BONUS OTHER(1) UNDERLYING OPTIONS
------ ----- -------- ------------------
<S> <C> <C> <C> <C>
Clayton A. Thomas, Jr.,
president and chief executive
officer............................... $157,500 $37,500 $ 6,000 --
Mark A. Mendes,
executive vice president and chief
operating officer................... 159,894 56,250 4,850
Donald E. Clarke,
executive vice president and chief
financial officer................... 151,371 55,000 4,850 56,250(2)
Bruce W. Bednarski,
senior vice president, technology
and services........................ 137,712 32,500 6,000 --
Peter B. Callowhill,
senior vice president,
sales -- north...................... 158,908 37,500 6,000 --
</TABLE>
- ---------------
(1) These amounts represent automobile allowances paid to the named executive
officers in the fiscal year ended December 31, 1999.
(2) This option becomes exercisable over a four-year period, 25% of which vested
immediately on the date of grant and the remainder vesting in monthly
installments for the next three years.
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<PAGE> 60
OPTION GRANTS IN 1999 AND YEAR-END OPTION VALUES
The following table sets forth information regarding options granted to the
named executive officers during 1999.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
- ------------------------------------------------------------------------------ VALUE AT ASSUMED
PERCENT OF ANNUAL RATES OF STOCK
NUMBER OF TOTAL PRICE APPRECIATION FOR
SECURITIES OPTIONS OPTION TERM
UNDERLYING GRANTED TO EXERCISE OR -------------------------
OPTIONS EMPLOYEES BASE PRICE EXPIRATION
NAME GRANTED(1) IN 1999(2) ($/SHARE)(3) DATE(4) 5% 10%
- ---- ---------- ---------- ------------ ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Clayton A. Thomas, Jr.... -- -- -- -- -- --
Mark A. Mendes........... -- -- -- -- $424,504 $1,075,776
Donald E. Clarke......... 56,250 2.4% $12.00 11/10/09
Bruce W. Bednarski....... -- -- -- -- -- --
Peter B. Callowhill...... -- -- -- -- -- --
</TABLE>
- ---------------
(1) All options were granted under our 1997 equity incentive plan. These options
are subject to vesting in the event of a change in control of our company.
(2) Based on options to purchase 2,349,368 shares of our common stock granted to
employees in 1999.
(3) The exercise or base price per share reflects the fair value of the common
stock if the options are issued with exercise prices below that amount. The
actual exercise price of Mr. Clarke's options granted in 1999 was $3.20 per
share which resulted in an unrealized gain on the date of grant of $495,000.
(4) The options have ten year terms, subject to earlier termination upon death,
disability or termination of employment.
YEAR-END OPTIONS VALUES
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1999 DECEMBER 31, 1999(1)
--------------------------- ---------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Clayton A. Thomas, Jr. ................... -- -- -- --
Mark A. Mendes............................ 528,728 75,532 $7,358,719 $1,051,237
Donald E. Clarke.......................... 301,505 136,441 $4,177,074 $1,812,491
Bruce W. Bednarski........................ -- -- -- --
Peter B. Callowhill....................... -- -- -- --
</TABLE>
- ---------------
(1) Calculated on the basis of the assumed initial public offering price of
$14.25 per share for our common stock, less the exercise price payable for
those shares, multiplied by the number of shares underlying the option.
No compensation intended to serve as incentive for performance to occur
over a period longer than one year was paid pursuant to a long-term incentive
plan during the last year to any of the executive officers named above.
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<PAGE> 61
EMPLOYMENT ARRANGEMENTS
We have entered into an employment agreement with each of our named
executive officers. Each agreement has an initial term of two and one-half years
and is automatically extended for additional one year terms unless we or the
executive elects to terminate the agreement within 60 days before the end of the
current term. Under these agreements, these executives receive an initial annual
base salary that will be subject to adjustment by our board of directors,
compensation committee, or chief executive officer. These executives also
receive an annual bonus of up to 25% of the executive's then current salary,
based upon performance objectives set by our senior management. The bonus is
payable 50% in cash and the remaining 50% in options to acquire shares of our
common stock which will have an exercise price at the then fair market value and
vest according to the terms of each executives' agreement. These executives also
receive an automobile allowance of $500 per month.
In November 1999, we entered into an employment agreement with Clyde
Heintzelman, our president. This agreement has an initial term of two years and
is automatically extended for an additional year unless we elect or Mr.
Heintzelman elects to terminate the agreement 60 days before the end of the
current term. The agreement provides that Mr. Heintzelman will receive
compensation in the form of a $190,000 base salary and a target annual bonus of
25% of his then current salary, based upon performance objectives set by our
chief executive officer. Mr. Heintzelman received an option to purchase 343,750
shares of our common stock at an exercise price of $3.20 per share. The amount
of unrealized gain that Mr. Heintzelman would receive is $3,798,437 based on the
initial offering price of $14.25.
The following table shows information about the compensation arrangements
for our executive officers as of December 31, 1999.
<TABLE>
<CAPTION>
ANNUAL TARGET
BASE SALARY ANNUAL BONUS
----------- ------------
<S> <C> <C>
Clayton A. Thomas, Jr. ..................................... $200,000 25%
Mark A. Mendes.............................................. 167,500 25%
Donald E. Clarke............................................ 158,000 25%
Clyde Heintzelman........................................... 190,000 25%
</TABLE>
Under the terms of the employment agreements, our executives have agreed to
preserve the confidentiality and the proprietary nature of all information
relating to our business during the term of the agreement and until the
information becomes public. In addition, each of these executives has agreed to
non-competition and non-solicitation provisions that will be in effect during
the term of this agreement and for eighteen months after the agreement ends.
1997 EQUITY INCENTIVE PLAN
Effective October 1997, we adopted our equity incentive plan. This plan
provides for the grant of stock-based awards to any of our employees, directors
or any person who provides us services.
Under the plan, we may grant:
- options that are intended to qualify as incentive stock options within
the meaning of Section 422 of the Internal Revenue Code;
- options not intended to qualify as incentive stock options;
- stock appreciation rights; and
- other stock-based awards.
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<PAGE> 62
Incentive stock options may be granted only to our employees. A total of
4,373,388 shares of common stock may be issued upon the exercise of options or
other awards granted under the plan. The exercisability of options or other
awards may in certain circumstances be accelerated in connection with an
acquisition event, as defined in the plan.
The plan expires in October 2007. As of December 31, 1999, we had granted
options to purchase an aggregate of 4,966,158 shares of common stock under the
plan, of which 797,110 shares have expired according to their terms. These
options generally vest monthly over a four-year period, beginning on the first
anniversary of the date of grant. No further options will be granted under the
plan after the effective date of the offering. Options granted under this plan
prior to its termination will remain outstanding according to their terms.
1999 STOCK INCENTIVE PLAN
Our stock incentive plan was adopted in November 1999. This plan authorizes
the grant of:
- stock options;
- stock appreciation rights;
- stock awards;
- phantom stock; and
- performance awards.
The compensation committee of our board of directors administers our stock
incentive plan. The committee has sole power and authority, consistent with the
provisions of our stock incentive plan, to determine which eligible participants
will receive awards, the form of the awards and the number of shares of our
common stock covered by each award. The committee may impose terms, limits,
restrictions and conditions upon awards, and may modify, amend, extend or renew
awards, to accelerate or change the exercise timing of awards or to waive any
restrictions or conditions to an award. As of December 31, 1999, we have granted
an option to purchase 343,750 shares of our common stock out of the 4,375,000
shares available under this plan.
STOCK OPTIONS. Our stock incentive plan permits the granting of options to
purchase shares of our common stock intended to qualify as incentive stock
options under the Internal Revenue Code and stock options that do not qualify as
incentive options. The option exercise price of each option will be determined
by the committee. The term of each option will be fixed by the committee. The
committee will determine at what time or times each option may be exercised and,
the period of time, if any, after retirement, death, disability or termination
of employment during which options may be exercised.
STOCK APPRECIATION RIGHTS. The committee may grant a right to receive a
number of shares or, in the discretion of the committee, an amount in cash or a
combination of shares and cash, based on the increase in the fair market value
of the shares underlying the right during a stated period specified by the
committee.
STOCK AWARDS. The committee may award shares of our common stock to
participants at no cost or for a purchase price. These stock awards may be
subject to restrictions or may be free from any restrictions under our stock
incentive plan. The committee shall determine the applicable restrictions. The
purchase price of the shares of our common stock will be determined by the
committee.
PHANTOM STOCK. The committee may grant stock equivalent rights, or phantom
stock, which entitles the recipient to receive credits which are ultimately
payable in the form of cash, shares of
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<PAGE> 63
our common stock or a combination of both. Phantom stock does not entitle the
holder to any rights as a stockholder.
PERFORMANCE AWARDS. The committee may grant performance awards to
participants entitling the participants to receive cash, shares of our common
stock, or a combination of both, upon the achievement of performance goals and
other conditions determined by the committee. The performance goals may be based
on our operating income, or on one or more other business criteria selected by
the committee.
1999 EMPLOYEE STOCK PURCHASE PLAN
Our employee stock purchase plan, which will become effective upon the
closing of this offering, provides for the issuance of up to 1,875,000 shares of
common stock. This plan, which is intended to qualify under Section 423 of the
Internal Revenue Code, provides our employees with an opportunity to purchase
shares of our common stock through payroll deductions.
All of our employees, including directors who are employees, are eligible
to participate in the purchase plan. Options to purchase our common stock will
initially be granted to each eligible employee on the first trading day on or
after the date of the initial public offering. Thereafter, options will be
granted on the first trading day on or after January 1 of each year, or such
other date as determined by the administrator. Each option will terminate on the
last trading day of a period specified by the administrator and no option period
will be longer than 27 months in duration. Subsequent option periods of equal
duration will consecutively follow, unless the administrator determines
otherwise.
Each option represents a right to purchase shares of our common stock. The
administrator determines the purchase price of each share of common stock,
provided that the purchase price will never be less than the lesser of 85% of
the fair market value of the common stock at the beginning or end of the option
period.
Any employee who immediately after a grant owns 5% or more of the total
combined voting power or value of our capital stock may not be granted an option
to purchase common stock under the purchase plan. Participation may also be
limited where rights to purchase stock under all other purchase plans accrue at
a rate which exceeds $25,000 of the fair market value of our common stock for
each calendar year.
401(k) plan
We adopted a tax-qualified employee savings and retirement plan, or 401(k)
plan, covering our full-time employees located in the United States. The 401(k)
plan is intended to qualify under Section 401(k) of the Internal Revenue Code of
1986, as amended, so that contributions to the 401(k) plan by employees, and the
investment earnings thereon, are not taxable to employees until withdrawn from
the 401(k) plan. Under the 401(k) plan, employees may elect to reduce their
current compensation up to the statutorily prescribed annual limit and have the
amount of such contribution contributed to the 401(k) plan. The 401(k) plan does
permit additional matching contributions to the 401(k) plan by us on behalf of
participants in the 401(k).
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CERTAIN TRANSACTIONS
SALE OF STOCK
In October 1997, we issued 4,087,592 shares of series A convertible
preferred stock for an aggregate purchase price of $3.5 million, including
1,167,884 shares to Mid Atlantic Venture Fund III, L.P., 1,167,884 shares to
Societe Generale Capital Corporation and 1,751,824 shares to Blue Water
Strategic Fund I, L.L.C., of which Mr. Miles, one of our directors, is a
managing director.
In May 1998, we issued 5,510,535 shares of series B convertible preferred
stock for an aggregate purchase price of $17.0 million, including 3,037,189
shares to Carlyle Venture Partners, L.P., of which Mr. Reese, a member of our
board of directors, is a managing director, 1,194,445 shares to PNC Capital
Corporation, 486,224 shares to Blue Water Strategic Fund I, L.L.C., of which Mr.
Miles, one of our directors, is a managing director, 468,528 shares to Societe
Generale Capital Corporation and 324,149 shares to Mid Atlantic Venture Fund
III, L.P.
In November 1998, we issued 2,140,310 shares of series C convertible
preferred stock for an aggregate purchase price of $30.0 million to Northern
Telecom Inc.
In connection with the preferred stock financings, we granted registration
rights to the preferred stockholders. Upon exercise of these registration
rights, these stockholders can require us to file registration statements
covering the sale of shares of common stock held by them and may include the
sale of their shares in registration statements covering our sale of shares to
the public.
ISSUANCE OF OPTIONS
In December 1997, October 1998 and November 1999, we granted to Mr. Geis
options to purchase 40,000, 10,000 and 12,500 shares of our common stock at
exercise prices of $.14, $3.40 and $5.60 per share, respectively, in connection
with his service as a member of our board of directors. In December 1997 and
October 1998, we granted options to Mr. Heintzelman to purchase 40,000 and
10,000 shares of our common stock at exercise prices of $.14 and $3.40 per
share, respectively, in connection with his service as a member of our board of
directors. In November 1999, upon becoming our president, Mr. Heintzelman
received an additional option to purchase 343,750 shares of common stock at an
exercise price of $3.20 per share, of which 114,583 shares immediately vested.
In December 1997 and May 1998, we granted to Mr. Clarke options to purchase
251,825 and 129,871 shares of our common stock at exercise prices of $.14 and
$.76 per share, respectively. In November 1999, Mr. Clarke received an
additional option to purchase 56,250 shares of our common stock at an exercise
price of $3.20 per share. In October 1997, we granted options to Mr. Mendes to
purchase 109,490 and 31,716 shares of our common stock at exercise prices of
$.685 and $1.577 per share, respectively. Additionally, in December 1997 and May
1998, Mr. Mendes received additional options to purchase 377,740 and 194,805
shares of our common stock at exercise prices of $.14 and $.76 per share,
respectively. Mr. Clarke and Mr. Mendes were granted options in connection with
their service as officers.
DEBT FINANCING
We entered into a credit agreement in November 1998 with Nortel. This
agreement provided for a five year, $120 million term loan facility and a five
year, $20 million revolving credit loan facility to finance a portion of our
costs to purchase Nortel equipment and services. The term loan and the revolving
credit loan facility were secured by a security agreement and a pledge agreement
whereby our subsidiaries pledged all of their stock and assets to Nortel.
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<PAGE> 65
In July 1999, we entered into a credit agreement with Nortel whereby Nortel
will provide draws to us under a term loan arrangement in an aggregate principal
amount of up to $75 million. This loan is to be used for the purchase of
telecommunications equipment and related software licenses and for working
capital purposes. To secure the loan, we have granted Nortel a security interest
in all of our assets. The loans must be repaid over a five-year period
commencing on November 2001. Interest payments are due monthly in the case of
base rate (prime based) draws or at the end of the LIBOR loan period. Interest
will accrue at a lower rate if we meet specified financial tests. As of
September 30, 1999, we had $24.3 million outstanding under this senior term loan
facility. On December 23, 1999, TD Securities (USA), Inc. and Goldman Sachs
Credit Partners L.P. purchased this facility.
Additionally, in July 1999, we issued to Nortel a senior discount note with
a principal of $75 million along with warrants to purchase 1,119,930 shares of
common stock at $0.008 per share. This note accrues interest at the Treasury
rate plus 8% per annum and requires no interest or principal payments until July
2004. For the next five years thereafter, we must pay interest semiannually at
an interest rate of 13.5%. The loan must be repaid in full upon the closing of
this offering. As of December 31, 1999, we had no principal amounts outstanding
under this senior discount note. However, on January 1, 2000, we borrowed $42
million dollars under this facility.
We have a policy whereby all transactions between us and our officers,
directors and affiliates will be on terms no less favorable to us than could be
obtained from unrelated third parties. These transactions must be approved by a
majority of the disinterested members of our board of directors.
EMPLOYMENT AGREEMENTS
We have employment agreements with our executive officers as described in
"Management -- Employment arrangements."
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<PAGE> 66
PRINCIPAL STOCKHOLDERS
The following table sets certain information regarding beneficial ownership
of our common stock as of December 31, 1999, and as adjusted to reflect the sale
of the shares offered hereby, by:
- each person who we know beneficially owns more that 5% of our common
stock;
- each member of our board of directors;
- each of our named executive officers; and
- all directors and executive officers as a group.
Unless otherwise indicated, the address for each stockholder listed is c/o
Net2000 Communications, Inc., 2180 Fox Mill Road, Herndon, Virginia 20171.
Except as otherwise indicated, each of the persons named in this table has sole
voting and investment power with respect to all the shares indicated.
For purposes of calculating the percentage beneficially owned, 24,862,610
shares of common stock equivalents are deemed outstanding before the offering,
including 10,189,565 shares of common stock outstanding as of December 31, 1999
and 14,673,045 shares of common stock equivalents issuable upon conversion of
the preferred stock. For purposes of calculating the percentage beneficially
owned, the number of shares deemed outstanding after the offering includes: (a)
all shares deemed to be outstanding before the offering and (b) 10,000,000
shares being sold in this offering, assuming no exercise of the underwriters'
over-allotment option. Share ownership in each case includes shares issuable
upon exercise of outstanding options and warrants that are exercisable within 60
days of December 31, 1999, as described in the footnotes below.
<TABLE>
<CAPTION>
PERCENT OF COMMON
NUMBER OF STOCK OUTSTANDING
SHARES --------------------
BENEFICIALLY BEFORE AFTER
NAME OF BENEFICIAL OWNER OWNED OFFERING OFFERING
- ------------------------ ------------ -------- --------
<S> <C> <C> <C>
Carlyle Venture Partners Group(1)....................... 3,796,486 15.3% 10.9%
c/o The Carlyle Group
1001 Pennsylvania Avenue, NW
Washington, DC 20004
Northern Telecom Inc.(2)................................ 3,795,317 14.6 10.6
2221 Lakeside Boulevard
Richardson, TX 75082
Blue Water Strategic Fund I, L.L.C.(3).................. 2,797,560 11.3 8.0
c/o Blue Water Capital
8300 Greensboro Drive
Suite 1210
McLean, VA 22102
Societe Generale Capital Corporation.................... 2,045,515 8.2 5.9
1221 Avenue of the Americas
New York, NY 10020
Mid-Atlantic Venture Fund III, L.P. .................... 1,865,041 7.5 5.9
11710 Plaza America Drive
Suite 120
Reston, VA 20190
</TABLE>
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<PAGE> 67
<TABLE>
<CAPTION>
PERCENT OF COMMON
NUMBER OF STOCK OUTSTANDING
SHARES --------------------
BENEFICIALLY BEFORE AFTER
NAME OF BENEFICIAL OWNER OWNED OFFERING OFFERING
- ------------------------ ------------ -------- --------
<S> <C> <C> <C>
PNC Capital Corporation(4).............................. 1,493,056 6.0 4.3
c/o PNC Equity Management Corporation
3150 CNG Tower
625 Liberty Avenue
Pittsburgh, PA 15222
Bruce W. Bednarski...................................... 2,488,750 10.0 7.2
Peter B. Callowhill..................................... 2,493,750 10.0 7.2
Donald E. Clarke(5)..................................... 303,851 1.2 *
Eric Geis(6)............................................ 34,791 * *
Clyde Heintzelman(7).................................... 165,347 * *
Corlyn A. Marsan........................................ 2,203,125 8.9 6.3
Mark A. Mendes(8)....................................... 638,218 2.5 1.8
Reid Miles(3)........................................... 2,797,560 11.3 8.0
Mitchell Reese(1)....................................... 3,796,486 15.3 10.9
Clayton A. Thomas, Jr.(9)............................... 2,471,250 9.9 7.1
All executive officers and directors as a group (16
persons)(10).......................................... 15,355,843 59.3 42.8
</TABLE>
- ---------------
* Less than one percent
(1) Represents (i) 2,678,660 shares beneficially owned by Carlyle Venture
Partners, L.P., (ii) 547,043 shares beneficially owned by C/S Venture
Investors, L.P., (iii) 355,260 shares beneficially owned by Carlyle U.S.
Venture Partners, L.P. and (iv) 215,522 shares beneficially owned by
Carlyle Venture Coinvestment, L.L.C. Mr. Reese, a director, is a managing
director of The Carlyle Group. Mr. Reese shares voting and dispositive
control over these shares. Mr. Reese disclaims beneficial ownership of
these shares except to the extent of his pecuniary interest. Mr. Reese's
address is c/o The Carlyle Group.
(2) Includes 1,119,992 shares issuable upon exercise of a warrant issued in
July 1999.
(3) All such shares are beneficially owned by Blue Water Strategic Fund I,
L.L.C. Mr. Miles, a director, is the founder and managing director of Blue
Water Capital, the managing member of the Blue Water Strategic Fund I,
L.L.C. Mr. Miles shares dispositive and voting control over these shares.
Mr. Miles disclaims beneficial ownership of these shares, except to the
extent of his pecuniary interest. Mr. Miles's address is c/o Blue Water
Capital.
(4) Represents (i) 1,248,941 shares beneficially owned by PNC Capital
Corporation and (ii) 244,155 shares beneficially owned by Wood Street
Partners.
(5) Includes 301,351 shares issuable upon exercise of options to acquire our
common stock.
(6) Includes 44,166 shares issuable upon exercise of options to acquire our
common stock.
(7) Includes 165,347 shares issuable upon exercise of options to acquire our
common stock.
(8) Includes 528,728 shares issuable upon exercise of options to acquire our
common stock.
(9) Includes 4,375 shares of our common stock held by Mr. Thomas' wife.
(10) Includes 1,124,807 shares issuable upon exercise of options to acquire our
common stock.
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<PAGE> 68
DESCRIPTION OF OUR CAPITAL STOCK
Our authorized capital stock currently consists of 200,000,000 shares of
common stock, with a par value of $0.01 per share, 11,738,437 shares of
preferred stock, with a par value of $0.01 per share and 60,000,000 shares of
undesignated capital stock, with a par value of $0.01 per share. As of December
31, 1999, there were 10,189,565 shares of our common stock outstanding, held of
record by 68 stockholders. As of December 31, 1999, we had outstanding an
aggregate of 11,738,437 shares of convertible preferred stock consisting of
4,087,592 shares of series A preferred stock, 5,510,535 shares of series B
preferred stock, and 2,140,310 shares of series C preferred stock. Effective May
19, 1998 and November 4, 1998, we declared a four for one stock split in the
form of a stock dividend payable on May 19, 1998 and November 4, 1998 for
stockholders of record of our common stock and series A preferred stock,
respectively. The series A, B and C preferred stock are held of record by three,
five, and one stockholders, respectively. All outstanding shares of preferred
stock will be automatically converted into an aggregate of 14,673,045 shares of
common stock upon the closing of this offering and will no longer be issued and
outstanding. After this offering, we will have outstanding 34,862,610 shares of
common stock if the underwriters do not exercise their over-allotment option, or
36,362,610 shares of common stock if the underwriters exercise their
over-allotment option in full.
The following is a description of our capital stock.
COMMON STOCK
Holders of common stock are entitled to one vote for each share of record
on all matters submitted to a vote of stockholders. The holders of common stock
are entitled to receive ratably such lawful dividends as may be declared by the
board of directors. However, such dividends are subject to preferences that may
be applicable to the holders of any outstanding shares of preferred stock. In
the event of a liquidation, dissolution, or winding up of the affairs of our
company, whether voluntary or involuntary, the holders of common stock will be
entitled to receive pro rata all of our remaining assets available for
distribution to stockholders. Any such pro rata distribution would be subject to
the rights of the holders of any outstanding shares of preferred stock. Our
common stock has no preemptive, redemption, conversion or subscription rights.
Piper Marbury Rudnick & Wolfe LLP, our counsel, will opine that the shares of
common stock to be issued by us in this offering, when issued and sold in the
manner described in the prospectus and in accordance with the resolutions
adopted by the board of directors, will be fully paid and non-assessable. The
rights, powers, preferences and privileges of holders of our common stock are
subject to, and may be adversely affected by, the rights of the holders of
shares of any series of preferred stock that we may designate and issue in the
future.
PREFERRED STOCK
At the closing of the offering, our outstanding shares of preferred stock
will be automatically converted into common stock. For a description of this
preferred stock, please see note 7 to the notes to financial statements included
elsewhere in this prospectus.
UNDESIGNATED CAPITAL STOCK
Immediately following the offering, our board will have the authority to
designate and issue up to 60,000,000 shares of capital stock, in one or more
series. Our board can establish the preferences, rights and privileges of each
series, which may be superior to the rights of the common stock.
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<PAGE> 69
WARRANTS
We have outstanding a warrant to purchase up to 1,119,992 shares of our
common stock at an exercise price of $0.008 per share, expiring July 30, 2009.
This warrant is currently exercisable.
REGISTRATION RIGHTS
After this offering, holders of (i) an aggregate of 5,109,490 shares of
common stock issued upon the conversion of the series A preferred stock (the
"series A registrable shares"); (ii) 6,888,168 shares of common stock issued
upon the conversion of the series B preferred stock (the "series B registrable
shares"); and (iii) 2,675,387 shares of common stock issued upon the conversion
of the series C preferred stock (the "series C registrable shares") will be
entitled to rights with respect to the registration of such shares under the
Securities Act.
Pursuant to the Second Amended and Restated Investor Rights Agreement,
dated November 4, 1998, the holders of 14,673,045 shares of our common stock
have the right to register the sale of those shares under the Securities Act of
1933. Subject to limitations provided in the investor rights agreement,
including those in lock-up agreements that these stockholders have signed
relating to this offering, these stockholders have the right, beginning six
months after the closing of this offering, upon request of the holders of at
least a majority in interest in the series A registrable shares, series B
registrable shares or series C registrable shares, to require us to register
under the Securities Act the sale of shares having an aggregate offering price
of at least $20,000,000 (a "demand registration"). The number of demand
registrations for each class is limited to one, provided that each group of
registrable shares has not previously requested four registration statements on
Form S-3. Each class of registrable shares is entitled to an additional demand
registration in the event that less than 70% of the registrable shares requested
to be registered were not included in a demand registration. In addition to
these demand registration rights and, subject to conditions and limitations
provided in the investor rights agreement, each class of these stockholders may
require us to file a maximum of four registration statements on Form S-3 under
the Securities Act, or three if a demand registration was requested, when such
form is available for our use, generally one year after this offering.
If we propose to register our securities under the Securities Act after
this offering, these stockholders will be entitled to notice of the registration
and to include their shares in the registration provided that the underwriters
of the proposed offering will have the right to limit the number of shares
included in the registration. We must pay for all expenses in connection with
these registrations, other than underwriters' discounts and commissions.
ANTI-TAKEOVER EFFECTS OF OUR CERTIFICATE OF INCORPORATION AND BYLAWS AND
DELAWARE GENERAL CORPORATION LAW
OUR CERTIFICATE OF INCORPORATION AND BYLAWS AND DELAWARE GENERAL
CORPORATION LAW. Certain provisions of Delaware law and our certificate of
incorporation and bylaws could make the following more difficult:
- the acquisition of us by means of a tender offer;
- acquisition of us by means of a proxy contest or otherwise; or
- the removal of our incumbent officers and directors.
These provisions, summarized below, are expected to discourage certain
types of coercive takeover practices and inadequate takeover bids. These
provisions are also designed to encourage persons seeking to acquire control of
us to first negotiate with our board. We believe that the benefits of increased
protection of the potential ability to negotiate with the proponent of an
unfriendly or unsolicited proposal to acquire or restructure us outweigh the
disadvantages of
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<PAGE> 70
discouraging such proposals because negotiation of such proposals could result
in an improvement of their terms.
ELECTION AND REMOVAL OF DIRECTORS. Our board of directors is divided into
three classes. The directors in each class will serve for a three-year term, one
class being elected each year by our stockholders. This system of electing and
removing directors may tend to discourage a third party from making a tender
offer or otherwise attempting to obtain control of us because it generally makes
it more difficult for stockholders to replace a majority of the directors.
In addition, our bylaws provide that, except as otherwise provided by law
or our certificate of incorporation, newly created directorships resulting from
an increase in the authorized number of directors or vacancies on the board may
be filled only by:
- a majority of the directors then in office, though less than a quorum is
then in office; or
- by the sole remaining director.
STOCKHOLDER MEETINGS. Under our certificate of incorporation and bylaws,
only the chairman of the board, the president or a majority of the board of
directors may call special meetings of stockholders.
REQUIREMENTS FOR ADVANCE NOTIFICATION OF STOCKHOLDER NOMINATIONS AND
PROPOSALS. Our bylaws will establish advance notice procedures with respect to
stockholder proposals and the nomination of candidates for election as
directors, other than nominations made by or at the direction of the board of
directors or a committee of the board.
DELAWARE ANTI-TAKEOVER LAW. We are subject to Section 203 of the Delaware
general corporation law, an anti-takeover law. In general, Section 203 prohibits
a publicly held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years following the date
the person became an interested stockholder, unless the "business combination"
or the transaction in which the person became an interested stockholder is
approved in a prescribed manner. Generally, a "business combination" includes a
merger, asset or stock sale, or other transaction resulting in a financial
benefit to the interested stockholder. Generally, an "interested stockholder" is
a person who, together with affiliates and associates, owns or within three
years prior to the determination of interested stockholder status, did own, 15%
or more of a corporation's voting stock. The existence of this provision may
have an anti-takeover effect with respect to transactions not approved in
advance by the board of directors, including discouraging attempts that might
result in a premium over the market price for the shares of common stock held by
stockholders.
ELIMINATION OF STOCKHOLDER ACTION BY WRITTEN CONSENT. Upon the completion
of the offering, our certificate of incorporation will eliminate the right of
stockholders to act by written consent without a meeting, unless the consent is
unanimous. This provision may have the effect of discouraging, delaying or
making more difficult a change in control of our company or preventing the
removal of incumbent directors even if a majority of our stockholders were to
deem such an action to be in our best interests.
UNDESIGNATED CAPITAL STOCK. The authorization of undesignated capital stock
will make it possible for our board of directors to issue stock with voting or
other rights or preferences that could impede the success of any attempt to
change control of Net2000. These and other provisions may have the effect of
deterring hostile takeovers or delaying changes in control of our company or
management.
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<PAGE> 71
LIMITATION OF LIABILITY
As permitted by the Delaware general corporation law, our certificate of
incorporation provides that our directors shall not be personally liable to us
or our stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability:
- for any breach of the director's duty of loyalty to us or our
stockholders;
- for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- under Section 174 of the Delaware general corporation law, relating to
unlawful payment of dividends or unlawful stock purchase or redemption of
stock; or
- for any transaction from which the director derives an improper personal
benefit.
As a result of this provision, we and our stockholders may be unable to
obtain monetary damages from a director for breach of his or her duty of care.
Our certificate of incorporation and bylaws provide for the indemnification
of our directors and officers to the fullest extent authorized by the Delaware
general corporation law. The indemnification provided under our certificate of
incorporation and bylaws includes the right to be paid expenses in advance of
any proceeding for which indemnification may be had, provided that the payment
of these expenses incurred by a director or officer in advance of the final
disposition of a proceeding may be made only upon delivery to us of an
undertaking by or on behalf of the director or officer to repay all amounts so
paid in advance if it is ultimately determined that the director or officer is
not entitled to be indemnified. If we do not pay a claim for indemnification
within 60 days after we have received a written claim, the claimant may at any
time thereafter bring an action to recover the unpaid amount of the claim and,
if successful, the director or officer will be entitled to be paid the expense
of prosecuting the action to recover these unpaid amounts.
Under our bylaws, we have the power to purchase and maintain insurance on
behalf of any person who is or was one of our directors, officers, employees or
agents, or is or was serving at our request as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise against any liability asserted against the person or incurred by the
person in any of these capacities, or arising out of the person's fulfilling one
of these capacities, and related expenses, whether or not we would have the
power to indemnify the person against the claim under the provisions of the
Delaware general corporation law. We intend to purchase director and officer
liability insurance on behalf of our directors and officers.
STOCK TRANSFER AGENT
The transfer agent and registrar for our common stock is American Stock
Transfer and Trust Company.
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<PAGE> 72
SHARES ELIGIBLE FOR FUTURE SALE
After this offering, we will have 34,862,610 shares of common stock
outstanding. If the underwriters exercise their over-allotment option in full,
we will have 36,362,610 shares of common stock outstanding. 10,000,000 of the
shares we sell in this offering will be freely tradable without restriction or
further registration under the Securities Act, except that any shares purchased
by our affiliates, as that term is defined in Rule 144, may generally only be
sold in compliance with the limitations of Rule 144, which is summarized below.
The remaining 71%, or 24,862,610 shares of common stock outstanding after
this offering, will be restricted shares under the terms of the Securities Act,
of which 24,774,252 shares are subject to lock-up agreements as described below.
Restricted shares may be sold in the public market only if registered or if they
qualify for an exemption from registration under Rules 144, 144(k) or 701
promulgated under the Securities Act, and subject to the lock-up requirements
which rules are summarized below. Giving effect to the lock-up agreements
described below, these restricted shares will be available for resale in the
public market as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES DATE OF FIRST AVAILABILITY FOR RESALE
---------------- -------------------------------------
<C> <S>
45,000 Immediately after the date of this prospectus
43,358 90 days after the date of this prospectus
24,774,252 After 180 days from the date of the prospectus subject, in
some cases, to volume limitations
</TABLE>
Before this offering, there has been no public market for our common stock,
and we cannot predict what effect, if any, that market sales of shares of our
common stock or the availability of shares of our common stock for sale will
have on the market price of our common stock prevailing from time to time. Sales
of substantial amounts of our common stock in the public market could adversely
affect prevailing market prices and could impair our future ability to raise
capital through the sale of our equity securities.
RULE 144
In general, under Rule 144, beginning 90 days after the effective date of
the offering, a stockholder who owns restricted shares that have been
outstanding for at least one year is entitled to sell, within any three-month
period, a number of these restricted shares that does not exceed the greater of:
- one percent of the then outstanding shares of our common stock, or
348,626 shares immediately after this offering; or
- the average weekly trading volume in our common stock on the Nasdaq
National Market during the four calendar weeks preceding the sale.
In addition, our affiliates must comply with the restrictions and
requirements of Rule 144, other than the one-year holding period requirement, to
sell shares of common stock that are not restricted securities.
Under Rule 144(k), a stockholder who is not currently, and who has not been
for at least three months before the sale, an affiliate of ours who owns
restricted shares that have been outstanding for at least two years may resell
these restricted shares without compliance with the above requirements. The one-
and two-year holding periods described above do not begin to run until the full
purchase price is paid by the person acquiring the restricted shares from us or
an affiliate of ours.
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<PAGE> 73
REGISTRATION RIGHTS
We have entered into an investor rights agreement with some of our
stockholders, who will own an aggregate of 14,673,045 shares of our common stock
following this offering. These stockholders have registration rights which, upon
exercise, require us to file registration statements covering the sale of their
shares of common stock and to include the sale of their shares in registration
statements covering our sale of shares to the public. See "Description of our
Capital Stock -- Registration Rights."
STOCK OPTIONS
We intend to file one or more registration statements under the Securities
Act within 180 days after this offering to register up to 8,748,388 shares of
our common stock underlying outstanding stock options or reserved for issuance
under our stock plans. We expect these registration statements will become
effective upon filing, and shares covered by these registration statements will
be eligible for sale in the public market immediately after the effective dates
of these registration statements, subject to the lock-up agreements described
below.
LOCK-UP AGREEMENTS
All of our officers and directors and other holders of all of our capital
stock have agreed that they will not, without the prior written consent of
Goldman, Sachs & Co., offer, sell, pledge or otherwise dispose of any shares of
our capital stock or any securities convertible into or exercisable or
exchangeable for, or any rights to acquire or purchase, any of our capital stock
or publicly announce an intention to effect any of these transactions, for a
period of 180 days from the date of this prospectus.
Goldman, Sachs & Co. currently has no plans to release any portion of the
securities subject to lock-up agreements. When determining whether or not to
release any portion of the securities subject to lock-up agreements, Goldman,
Sachs & Co. will consider, among other factors, the stockholder's reasons for
requesting the release, the number of shares for which the release is being
requested and market conditions at the time.
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<PAGE> 74
UNDERWRITING
Net2000 and the underwriters named below have entered into an underwriting
agreement with respect to the shares being offered. Subject to certain
conditions, each underwriter has severally agreed to purchase the number of
shares indicated in the following table. Goldman, Sachs & Co., Donaldson, Lufkin
& Jenrette Securities Corporation, J.P. Morgan Securities Inc. and Legg Mason
Wood Walker, Incorporated are the representatives of the Underwriters.
<TABLE>
<CAPTION>
Underwriters Number of Shares
------------ ----------------
<S> <C>
Goldman, Sachs & Co. .......................................
Donaldson, Lufkin & Jenrette Securities Corporation.........
J.P. Morgan Securities Inc. ................................
Legg Mason Wood Walker, Incorporated........................
----------
Total............................................. 10,000,000
==========
</TABLE>
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional
1,500,000 shares from Net2000 to cover such sales. They may exercise that option
for 30 days. If any shares are purchased pursuant to this option, the
underwriters will severally purchase shares in approximately the same proportion
as set forth in the table above.
The following table shows the per share and total underwriting discounts
and commissions to be paid to the underwriters by Net2000. Such amounts are
shown assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares.
<TABLE>
<CAPTION>
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per Share.............................................. $ $
Total........................................ $ $
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial public offering price. Any such
securities dealers may resell any shares purchased from the underwriters to
certain other brokers or dealers at a discount of up to $ per share from the
initial public offering price. If all the shares are not sold at the initial
offering price, the representatives may change the offering price and the other
selling terms.
Net2000 has agreed with the underwriters not to dispose of or hedge any of
its common stock or securities convertible into or exchangeable for shares of
common stock during the period from the date of this prospectus continuing
through the date 180 days after the date of this prospectus, except with the
prior written consent of the representatives. This agreement does not apply to
any existing employee benefit plans. See "Shares Eligible for Future Sale" for a
discussion of certain transfer restrictions.
Prior to the offering, there has been no public market for the shares. The
initial public offering price has been negotiated among Net2000 and the
representatives. Among the factors to be considered in determining the initial
public offering price of the shares, in addition to prevailing market
conditions, will be Net2000's historical performance, estimates of the business
potential and earnings prospects of Net2000, an assessment of Net2000's
management and the consideration of the above factors in relation to market
valuation of companies in related businesses.
Application has been made for quotation of the common stock on the Nasdaq
National Market under the symbol "NTKK."
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<PAGE> 75
In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. Stabilizing
transactions consist of certain bids or purchases made for the purpose of
preventing or retarding a decline in the market price of the common stock while
the offering is in progress.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on the Nasdaq
National Market, in the over-the-counter market or otherwise.
The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered.
Net2000 estimates that its share of the total expenses of the offering,
excluding underwriting discounts and commissions, will be approximately $1.2
million.
Net2000 has agreed to indemnify the several underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
VALIDITY OF THE SHARES
Piper Marbury Rudnick & Wolfe LLP, Reston, Virginia, will pass upon the
validity of the shares of common stock on our behalf. Latham & Watkins, New
York, New York will pass upon legal matters for the underwriters.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements at September 30, 1999, December 31, 1998 and December 31,
1997, and for each of the three years in the period ended December 31, 1998 and
the nine months ended September 30, 1999, as set forth in their report. We've
included our financial statements in the prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's report, given on their
authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
We have filed with the SEC a registration statement, including exhibits,
schedules and amendments. This prospectus is a part of the registration
statement and includes all of the information that we believe is material to an
investor considering whether to make an investment in our common stock. We refer
you to the registration statement for additional information about us, our
common stock and this offering, including the full texts of the exhibits, some
of which have been summarized in this prospectus. The registration statement is
available for inspection and copying at the SEC's Public Reference Room at 450
Fifth Street, N.W., Washington, D.C. 20549. You may obtain information about the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In
addition, the SEC maintains an Internet site that contains the registration
statement. The address of the SEC's Internet site is "http://www.sec.gov."
73
<PAGE> 76
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
NET2000 COMMUNICATIONS, INC.
<TABLE>
<S> <C>
Report of Independent Auditors.............................. F-2
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1997, 1998,
September 30, 1999 and September 30, 1999 (pro forma)..... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1997, 1998 and for the Nine Months
Ended September 30, 1998 and 1999......................... F-4
Consolidated Statements of Stockholders' Equity / (Deficit)
for the Years Ended December 31, 1996, 1997, 1998 and for
the Nine Months Ended September 30 1999................... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1997, 1998 and for the Nine Months
Ended September 30, 1998 and 1999......................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 77
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Net2000 Communications, Inc.
We have audited the accompanying consolidated balance sheets of Net2000
Communications, Inc. as of December 31, 1997, 1998 and September 30, 1999 and
the related consolidated statements of operations, stockholders'
equity/(deficit) and cash flows for each of the three years in the period ended
December 31, 1998 and for the nine months ended September 30, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Net2000
Communications, Inc. at December 31, 1997, 1998 and September 30, 1999 and the
results of their operations and their cash flows for each of the three years in
the period ended in December 31, 1998 and the nine months ended September 30,
1999, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
McLean, VA
November 19, 1999, except for Note 13, as to which the date is January 12, 2000
F-2
<PAGE> 78
NET2000 COMMUNICATIONS, INC
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1997 1998 1999 1999
------------ ------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current assets:
Cash & cash equivalents........................ $ 2,347,803 $33,439,030 $ 13,319,806 $ 13,319,806
Restricted cash................................ -- 948,707 1,687,275 1,687,275
Accounts receivable, net of allowance for
doubtful accounts of approximately $10,000,
$229,000, and $1,660,000 at December 31,
1997, 1998 and September 30, 1999,
respectively................................. 1,035,599 3,618,646 5,476,601 5,476,601
Other current assets........................... 68,843 50,950 738,668 738,668
----------- ------------ ------------ ------------
Total current assets............................. 3,452,245 38,057,333 21,222,350 21,222,350
Property and equipment, net of accumulated
depreciation................................... 509,516 11,528,518 49,623,461 49,623,461
Other noncurrent assets.......................... 78,185 504,657 3,255,947 3,255,947
----------- ------------ ------------ ------------
Total assets..................................... $ 4,039,946 $50,090,508 $ 74,101,758 $ 74,101,758
=========== ============ ============ ============
LIABILITIES AND STOCKHOLDERS EQUITY/(DEFICIT)
Current liabilities:
Line of credit................................. $ 440,176 $ -- $ -- $ --
Accounts payable............................... 365,924 1,402,010 471,944 471,944
Accrued expenses and other current
liabilities.................................. 415,109 3,670,907 13,921,324 13,921,324
Current maturities of capital lease
obligation................................... 148,337 2,422,597 3,073,818 3,073,818
----------- ------------ ------------ ------------
Total current liabilities........................ 1,369,546 7,495,514 17,467,086 17,467,086
Capital lease obligation, less current
maturities..................................... 257,885 2,000,155 1,729,896 1,729,896
Related party noncurrent liabilities............. -- 4,811,381 16,463,595 16,463,595
Note payable (net of unamortized discount of
$7,700,215).................................... -- -- 16,555,734 16,555,734
Redeemable convertible Series A, B and C
preferred stock, $0.01 par value; 12,000,000
shares authorized, 4,087,592, 11,738,437 and
11,738,437 issued and outstanding at December
31, 1997, 1998 and September 30, 1999,
respectively................................... 3,500,000 59,403,297 75,180,969 --
Stockholders' (deficit) equity:
Common stock, $0.01 par value; 28,000,000,
30,000,000 and 30,000,000 shares authorized,
10,000,000, 10,109,490 and 10,115,321 shares
issued and outstanding at December 31, 1997,
1998 and September 30, 1999, respectively.... 100,000 101,095 101,153 247,883
Additional capital............................... 87,216 299,061 10,508,347 85,542,586
Deferred stock compensation...................... (87,216) (162,102) (2,236,069) (2,236,069)
Accumulated deficit.............................. (1,187,485) (23,857,893) (61,668,953) (61,668,953)
----------- ------------ ------------ ------------
Total stockholders' (deficit) equity..... (1,087,485) (23,619,839) (53,295,522) 21,885,447
----------- ------------ ------------ ------------
Total liabilities and stockholders'
deficit................................ $ 4,039,946 $50,090,508 $ 74,101,758 $ 74,101,758
=========== ============ ============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE> 79
NET2000 COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDING
YEAR ENDING DECEMBER 31, SEPTEMBER 30,
--------------------------------------- ---------------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Telecommunications...................... $ 17,830 $ 88,111 $ 6,465,903 $ 2,991,373 $ 18,669,796
Agency commissions and other............ 1,921,607 3,456,118 2,952,999 2,926,585 --
---------- ----------- ------------ ------------ ------------
Total revenues............................ 1,939,437 3,544,229 9,418,902 5,917,958 18,669,796
Operating costs and expenses:
Operating costs......................... 514,040 906,999 7,888,478 3,855,117 15,497,597
Selling, general and administrative..... 1,313,600 3,832,971 15,074,961 9,982,639 26,287,787
Non-cash compensation expense........... -- -- 63,054 48,982 231,893
Depreciation and amortization........... 26,758 122,437 686,670 337,257 2,124,973
---------- ----------- ------------ ------------ ------------
Income (loss) from operations............. 85,039 (1,318,178) (14,294,261) (8,306,037) (25,472,454)
Other income (expenses):
Gain on sale of consulting division..... -- 875,000 -- -- --
Settlement of supplier dispute.......... -- -- -- -- 3,500,000
Miscellaneous (expense) income.......... (5,905) 7,838 3,104 -- 77,189
Interest income......................... -- 18,517 679,450 327,529 913,689
Interest expense........................ (11,464) (84,666) (155,405) (83,401) (1,051,812)
---------- ----------- ------------ ------------ ------------
Income (loss) before provision for income
taxes................................... 67,670 (501,489) (13,767,112) (8,061,909) (22,033,388)
Provision for income taxes................ -- -- -- -- --
---------- ----------- ------------ ------------ ------------
Net income (loss)......................... $ 67,670 $ (501,489) $(13,767,112) $ (8,061,909) $(22,033,388)
========== =========== ============ ============ ============
Preferred stock accretion................. -- -- (8,903,296) (5,570,251) (15,777,672)
---------- ----------- ------------ ------------ ------------
Net income (loss) available to common
stockholders............................ $ 67,670 $ (501,489) $(22,670,408) $(13,632,160) $(37,811,060)
========== =========== ============ ============ ============
Pro forma net (loss) income available to
common shareholders..................... -- $ (501,489) $(13,767,112) $ (8,061,909) $(22,033,388)
========== =========== ============ ============ ============
Basic and diluted earnings per share...... $ 0.01 $ (0.05) $ (2.25) $ (1.35) $ (3.74)
========== =========== ============ ============ ============
Pro forma basic and diluted earnings per
share................................... $ (0.69) $ (0.89)
============ ============
Shares used in calculation of loss per
share:
Basic and diluted......................... 10,000,000 10,000,000 10,079,793 10,069,785 10,110,093
Pro forma basic and diluted............... 19,886,745 24,783,139
</TABLE>
See accompanying notes.
F-4
<PAGE> 80
NET2000 COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY/(DEFICIT)
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK DEFERRED RETAINED STOCKHOLDERS'
------------ ADDITIONAL STOCK EARNINGS EQUITY/
SHARES AMOUNT CAPITAL COMPENSATION (DEFICIT) (DEFICIT)
------ ------ ---------- ------------ --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995......................... 10,000,000 $100,000 $ -- $ -- $ 91,334 $ 191,334
Net income................. -- -- -- -- 67,670 67,670
---------- -------- ----------- ----------- ------------ ------------
Balance at December 31,
1996....................... 10,000,000 100,000 -- -- 159,004 259,004
Net loss................... -- -- -- -- (501,489) (501,489)
S Corp. distribution....... -- -- -- -- (845,000) (845,000)
Issuance of compensatory
stock options............ -- -- 87,216 (87,216) -- --
---------- -------- ----------- ----------- ------------ ------------
Balance at December 31,
1997....................... 10,000,000 100,000 87,216 (87,216) (1,187,485) (1,087,485)
Net loss................... -- -- -- -- (13,767,112) (13,767,112)
Exercise of stock
options.................. 109,490 1,095 73,905 -- -- 75,000
Issuance of compensatory
stock Options............ -- -- 137,940 (137,940) -- --
Amortization of deferred
stock Compensation....... -- -- -- 63,054 -- 63,054
Accretion of Preferred
Stock.................... (8,903,296) (8,903,296)
---------- -------- ----------- ----------- ------------ ------------
Balance at December 31,
1998....................... 10,109,490 101,095 299,061 (162,102) (23,857,893) (23,619,839)
Net loss................... -- -- -- -- (22,033,388) (22,033,388)
Exercise of stock
options.................. 5,831 58 759 -- -- 817
Issuance of compensatory
stock Options............ -- -- 2,305,860 (2,305,860) -- --
Amortization of deferred
stock compensation....... -- -- -- 231,893 -- 231,893
Issuance of Warrants....... -- -- 7,902,667 -- -- 7,902,667
Accretion of Preferred
Stock.................... -- -- -- -- (15,777,672) (15,777,672)
---------- -------- ----------- ----------- ------------ ------------
Balance at September 30,
1999....................... 10,115,321 $101,153 $10,508,347 $(2,236,069) $(61,668,953) $(53,295,522)
========== ======== =========== =========== ============ ============
</TABLE>
See accompanying notes.
F-5
<PAGE> 81
NET2000 COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------------------------- ------------------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).......................... $ 67,670 $ (501,489) $(13,767,112) $(8,061,909) $(22,033,388)
Adjustments to reconcile net income (loss)
to net cash provided (used) by operating
activities:
Depreciation and amortization............ 26,758 122,437 686,670 337,257 2,327,425
Allowance for doubtful accounts.......... -- 10,000 218,776 277,782 1,431,283
Deferred stock compensation.............. -- -- 63,054 16,353 231,893
Changes in operating assets and
liabilities:
Accounts receivable.................... (173,040) (636,255) (2,790,822) (1,108,073) (3,289,238)
Other current assets................... 4,116 (32,783) 6,893 939 (687,718)
Other noncurrent assets................ 12,967 (70,316) (426,473) (394,698) (2,751,290)
Accounts payable....................... (6,937) 312,870 1,036,086 777,398 (930,066)
Accrued expenses and other current
liabilities.......................... 69,873 319,236 3,255,798 1,452,148 10,250,417
--------- ----------- ------------ ----------- ------------
Net cash provided by (used in) operating
activities............................... 1,407 (476,300) (11,717,130) (6,702,803) (15,450,682)
INVESTING ACTIVITIES
Acquisition of property and equipment...... (33,861) (87,746) (2,031,058) (561,239) (26,111,496)
Restricted cash............................ -- -- (948,707) (948,707) (738,568)
--------- ----------- ------------ ----------- ------------
Net cash used in investing activities...... (33,861) (87,746) (2,979,765) (1,509,946) (26,850,064)
FINANCING ACTIVITIES
Proceeds from line of credit............... 75,000 560,176 75,000 75,000 --
Repayments on line of credit............... (135,000) (120,000) (515,176) (515,176) --
Proceeds from notes payable to
shareholders'............................ 418,500 952,143 -- -- --
Repayments of notes payable from
shareholders'............................ (338,500) (1,052,143) -- -- --
Proceeds from issuance of common stock..... -- -- -- -- --
Proceeds from notes payable to related
party.................................... -- -- -- -- 24,255,949
Proceeds from exercise of stock options.... -- -- 75,000 75,000 817
Proceeds from sale of redeemable
convertible preferred stock.............. -- 3,500,000 47,000,001 17,000,001 --
S corporation distributions to
shareholders'............................ -- (845,000) -- -- --
Repayment of capital leases................ (17,654) (86,018) (846,703) (187,960) (2,075,244)
--------- ----------- ------------ ----------- ------------
Net cash provided by financing
activities............................... 2,346 2,909,158 45,788,122 16,446,865 22,181,522
Net (decrease) increase in cash............ (30,108) 2,345,112 31,091,227 8,234,116 (20,119,224)
Cash at the beginning of period............ 32,799 2,691 2,347,803 2,347,803 33,439,030
--------- ----------- ------------ ----------- ------------
Cash at the end of period.................. $ 2,691 $ 2,347,803 $ 33,439,030 $10,581,919 $ 13,319,806
========= =========== ============ =========== ============
</TABLE>
See accompanying notes.
F-6
<PAGE> 82
NET2000 COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Net2000 Group, Inc. was formed on June 18, 1993 under the laws of the State
of Virginia and on October 23, 1997, was reincorporated in the state of
Delaware. On November 1, 1998, Net2000 Group, Inc. entered into a
recapitalization transaction whereby it exchanged all of its stock with Net2000
Communications, Inc. As a result of the exchange, Net2000 Group Inc. became a
wholly owned subsidiary of Net2000 Communications, Inc. and accordingly, the
financial statements of Net2000 Communications, Inc. include the financial
position and results of operations of Net2000 Group, Inc. for all periods prior
to the transaction as the successor to Net2000 Group, Inc. Subsequent to the
transaction, the ownership interest of Net2000 Communications, Inc. is identical
to that of Net2000 Group, Inc. prior to the exchange of stock. References to
"the Company" represent Net2000 Group, Inc. for periods prior to the exchange
and Net2000 Communications, Inc. for all subsequent periods.
Subsequent to the transaction, seven wholly-owned subsidiaries were created
to address specific organizational functions, including Net2000 Communications
Holdings, Inc., Net2000 Investments, Inc., Net2000 Communications Group, Inc.,
Net2000 Communications Capital Equipment, Inc., Net2000 Communications Real
Estate, Inc., and Net2000 Communications of Virginia, LLC. In addition, Net2000
Group, Inc. changed its name to Net2000 Communications Services, Inc.
During 1998, the Company changed its primary business activity from the
selling of network services of Bell Atlantic on a commission basis to the resale
of local, long-distance, and data services. In 1999, the Company began
constructing and operating a packet- and circuit- switched network.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The 1997, 1998, and September 30, 1999 consolidated financial statements
include the accounts of the Company and all wholly owned subsidiaries. All
material intercompany transactions and balances have been eliminated in
consolidation.
UNAUDITED INTERIM FINANCIAL INFORMATION
The unaudited consolidated statements of operations and cash flow for the
nine months ended September 30, 1998 include, in the opinion of management, all
adjustments (consisting of normal and recurring adjustments) necessary to
present fairly the Company's results of operations and cash flow. All
information included in these notes to consolidated financial statements related
to the nine months ended September 30, 1998 is unaudited.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-7
<PAGE> 83
NET2000 COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with a maturity of three months or less at the time of
purchase to be cash equivalents. On December 31, 1997, 1998 and September 30,
1999, the Company had investments of $2,335,626, $32,870,179 and $12,243,167
respectively, in securities with maturities of less than three months which are
included in cash and cash equivalents.
STOCK COMPENSATION
The Company accounts for its stock-based compensation in accordance with
APB No. 25, "Accounting for Stock Issued to Employees" ("APB 25") using the
intrinsic value method. Stock-based compensation related to stock options
granted to non-employees is accounted for using the fair value method in
accordance with Statement of Financial Accounting Standard No. 123 "Accounting
for Stock-Based Compensation" (SFAS No. 123). The Company has made pro forma
disclosures required by SFAS No. 123.
REVENUE RECOGNITION
The Company recognizes telecommunications revenues over the period in which
the services are provided. Monthly recurring charges include fees paid by
customers for lines in service and additional features on those lines. Usage
charges are billed in arrears and are fully earned as usage is accrued on the
provider's network. Non-recurring revenue, typically for installation fees for
new customer lines, is recognized over the period in which the service is
performed. Commission revenues on agency sales are recognized when the product
has been installed or accepted for installation. Consulting revenue is
recognized when earned.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company considers the recorded value of its financial assets and
liabilities, consisting primarily of cash and cash equivalents, accounts
receivable, accounts payable, accrued expenses and debt, to approximate the fair
value of the respective assets and liabilities at December 31, 1997, 1998 and
September 30, 1999.
ADVERTISING COSTS
All advertising costs are expensed as incurred.
COMPREHENSIVE INCOME
For the years ended December 31, 1996, 1997, 1998 and nine months ended
September 30, 1999 the Company's net income reflects comprehensive income,
accordingly, no additional disclosure is presented.
F-8
<PAGE> 84
NET2000 COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
VALUATION ACCOUNTS
A summary of the Company's allowance for bad debts is the is as follows:
<TABLE>
<S> <C>
Balance at December 31, 1997........................... $ 10,000
Additions charged to expense......................... 219,000
Accounts receivable written-off...................... --
----------
Balance at December 31, 1998........................... 229,000
Additions charged to expense......................... 440,000
Additions from settlement (see Note 11).............. 1,500,000
Accounts receivable written-off...................... (509,000)
----------
Balance at September 30, 1999.......................... $1,660,000
==========
</TABLE>
IMPAIRMENT OF LONG-LIVED ASSETS
The Company assesses the impairment of long-lived assets in accordance with
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of
("SFAS 121"). SFAS 121 requires impairment losses to be recognized for
long-lived assets when indicators of impairment are present and the undiscounted
cash flows are not sufficient to recover the assets' carrying amount. The
impairment loss of these assets is measured by comparing the carrying amount of
the asset to its fair value, with any excess of carrying value over fair value
written off. Fair value is based on market prices where available, an estimate
of market value, or determined by various valuation techniques including
discounted cash flow.
3. NET LOSS PER COMMON SHARE
Basic and diluted net loss per common share is calculated by dividing the
net loss by the weighted average number of common shares outstanding. Pro forma
net loss per share is computed using the weighted average number of shares used
for basic and diluted per share
F-9
<PAGE> 85
NET2000 COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
amounts and the weighted average redeemable convertible preferred stock
outstanding as if such shares were converted to common stock at the time of
issuance.
<TABLE>
<CAPTION>
FOR THE NINE
FOR THE YEAR ENDING MONTHS ENDING
DECEMBER 31, SEPTEMBER 30,
-------------------------------------- ---------------------------
1996 1997 1998 1998 1999
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net (loss) income.... $ 67,670 $ (501,489) $(13,767,112) $ (8,061,909) $(22,033,388)
========== ========== ============ ============ ============
Preferred stock
accretion.......... -- -- (8,903,296) (5,570,251) (15,777,672)
---------- ---------- ------------ ------------ ------------
Net income (loss)
available to common
stockholders....... $ 67,670 $ (501,489) $(22,670,408) $(13,632,160) $(37,811,060)
========== ========== ============ ============ ============
Pro forma net (loss)
income available to
common
shareholders....... -- $ (501,489) $(13,767,112) $ (8,061,909) $(22,033,388)
========== ========== ============ ============ ============
Weighted average of
common shares,
denominator for
basic earnings per
share.............. 10,000,000 10,000,000 10,079,793 10,069,785 10,110,093
Effect of dilutive
securities:
Stock options...... -- -- -- -- --
Warrants........... -- -- -- -- --
Convertible stock.. -- -- -- -- --
---------- ---------- ------------ ------------ ------------
Denominator for
diluted earnings
per share.......... 10,000,000 10,000,000 10,079,793 10,069,785 10,110,093
========== ========== ============ ============ ============
Pro forma adjustment
for redeemable
preferred stock.... -- -- 9,806,953 -- 14,673,045
---------- ---------- ------------ ------------ ------------
Pro forma denominator
for basic and
diluted earnings
per share.......... -- -- 19,886,745 -- 24,783,138
========== ========== ============ ============ ============
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment, including leasehold improvements, are recorded at
cost. Depreciation is calculated using the straight-line method over the
estimated useful life ranging between three and eight years. Leasehold
improvements are amortized over the lesser of the related
F-10
<PAGE> 86
NET2000 COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
lease term or the useful life. Interest capitalized and included in the cost of
switch equipment totaled $308,311 at September 30, 1999.
The Company capitalizes certain software purchases and implementation costs
in accordance with FAS 86.
Construction in process includes equipment and other costs for switches
which are not complete as of the balance sheet dates. When construction of a
switch is complete the balance of the assets are transferred to switch
equipment, and depreciated in accordance with the Company's policy.
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER 30,
1997 1998 1999
---- ---- -------------
<S> <C> <C> <C>
Software................................. $ 1,651 $ 1,039,789 $10,048,888
Computer equipment....................... 458,971 5,241,808 6,649,495
Office furniture and equipment........... 127,161 301,213 4,911,830
Leasehold improvements................... 72,314 487,292 4,090,633
Vehicles................................. -- -- 293,101
Switch equipment......................... -- -- 11,021,522
Construction in process.................. -- 5,290,872 15,565,429
--------- ----------- -----------
660,097 12,360,974 52,580,898
Less accumulated depreciation and
amortization........................... (150,581) (832,456) (2,957,437)
--------- ----------- -----------
$ 509,516 $11,528,518 $49,623,461
========= =========== ===========
</TABLE>
5. DEBT
LINE OF CREDIT
At December 31, 1997, the Company had a line of credit arrangement with a
bank that allowed for aggregate borrowings up to $750,000. The line of credit
was secured by substantially all of the assets of the Company. At December 31,
1997, $440,176 was outstanding under this arrangement. The line of credit
accrued interest at the bank prime rate plus .5% per annum (9% as of December
31, 1997). The Company repaid all amounts outstanding and terminated the line on
February 10, 1998.
SECURED CREDIT FACILITIES
On November 2, 1998, Net2000 Communications Group, Inc., a subsidiary of
the Company (see Note 1, Organization) entered into credit facilities with
Northern Telecom, Inc. ("Nortel"), the Series C Preferred shareholder (see Note
7), in the aggregate principal amount of $140 million. The agreement consisted
of a Term Loan Facility in an aggregate principal amount of $120 million and a
Revolving Loan Facility with availability of $20 million (together, the "Credit
Agreement").
On July 30, 1999, the Company amended the Credit Agreement to restructure
the existing $140 million senior secured facility to provide for additional
working capital availability. The revised agreement provides for a Senior Term
Loan Facility in the aggregate principal amount of $75 million, and a Senior
Discount Note with a face amount of $75 million. The Senior Term Loan Facility
may only be used to purchase Nortel goods and services. The Senior Discount Note
may
F-11
<PAGE> 87
NET2000 COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
be used for general corporate purposes. The Senior Term Loan Facility is secured
by a first priority perfected security interest in or first priority lien on all
present and future assets of the Company. The Senior Discount Note is unsecured.
Interest on the Senior Term Loan Facility will accrue at a Prime Rate Loan Rate
plus 3.5% or Eurodollar Loan Rate plus 4.5% as defined in the terms of the
amended Credit Agreement (10.47% at September 30, 1999). The Senior Discount
Note will bear interest at the Treasury rate plus 8% per annum (13.50% at
September 30, 1999). Repayment of accrued interest on the Prime Rate Loan Rate
is on each quarterly due date. Repayment of accrued interest on a Eurodollar
loan is on the last day of the interest period, and in the case of interest
periods greater than three months, at three month intervals after the first day
of such interest period. Nortel is required to provide access to the credit
facilities through November 2, 2001 (commitment termination date). Beginning the
quarter after the commitment termination date, the Company is required to begin
repayment of the Senior Term Loan in twenty quarterly installments. The Senior
Discount Note will accrue interest semi-annually in arrears until the fifth
anniversary of the issuance date, after which interest will be due semi-annually
in arrears, with the principal due on July 30, 2009. The Senior Term Loan
Facility has certain mandatory prepayment options as defined in the agreement.
The Senior Discount Note has certain prepayment penalties, call limitations and
mandatory redemption features as defined in the agreement. If borrowings have
not exceeded approximately $44 million prior to either the sale of the Note to a
third party or July 31, 2000, the loan will automatically increase to that
level, and any additional borrowings will be prohibited. The amended Credit
Agreement contains covenants which require the Company to meet certain financial
measures in addition to other non financial covenants.
In connection with the Credit Agreement, the Company issued to Nortel
detachable warrants to acquire 1,119,992 shares of common stock at $0.008 per
share. The fair value of the warrants, $7.9 million, is treated as a discount on
the Company's debt and amortized as additional interest expense over the lives
of the respective debt instruments. The Company used the Black-Scholes pricing
model to estimate the fair value of the warrants with the following assumptions:
estimated fair value of the common stock of $7.06 per share; dividend yield of
0%; risk free interest rate of 6.5%; volatility of 25%; and expected life of
five years, consistent with the assumptions used for the stock option
disclosures required under SFAS 123 and included in Note 7 to the financial
statements.
At December 31, 1998 and September 30, 1999, the Company had purchased $4.8
million and $16.5 million, respectively, of Nortel goods and services which have
been classified as a noncurrent liability as these purchases were subsequently
financed under the credit facility. At September 30, 1999, the Company had $24.3
million and $0 outstanding under the Senior Term Loan Facility and Senior
Discount Note, respectively.
Maturities of notes payable outstanding as of September 30, 1999 are as
follows:
<TABLE>
<CAPTION>
FISCAL YEAR
- -----------
<S> <C>
2000........................................................ $ --
2001........................................................ --
2002........................................................ 3,638,392
2003........................................................ 3,638,392
2004........................................................ 4,851,190
Thereafter.................................................. 12,127,975
-----------
Total notes payable......................................... $24,255,949
===========
</TABLE>
F-12
<PAGE> 88
NET2000 COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company paid interest of $11,464, $52,410, $173,058, and $886,607
related to the notes payable and capital leases in the years ended December 31,
1996, 1997 and 1998, and for the nine months ended September 30, 1999,
respectively.
LETTERS OF CREDIT
The Company maintains irrevocable letters of credit with three separate
vendors, which are disclosed as restricted cash on the balance sheet. The first
letter of credit, in the amount of $900,000, has a two year term expiring on
September 30, 2000 and serves as an advanced security deposit in connection with
the financing of certain billing system equipment under capital lease. This
letter of credit was amended on October 6, 1999 for an additional amount of
$984,289, which represents an advanced security deposit in connection with the
financing of financial and operational support system hardware, software and
services under capital lease. The additional amount has a three year term
expiring on October 31, 2002. The term of the original $900,000 amount was
extended to February 28, 2002. The second letter of credit for $48,125 had a one
year term which expired on September 30, 1999, and represented a deposit in
support of the Company's local service resale activities. The third letter of
credit for $730,969 has a seven year term expiring on June 10, 2006, and
represents a deposit in support of the Company's obligations under an office
space lease agreement. The letters of credit are fully collateralized by
certificates of deposits maintained with a bank, with maturities ranging from 90
days to one year, and with stated interest rates ranging from 3.19% to 5.35%.
Subsequent to September 30, 1999, the Company secured lease space for a switch
site with a letter of credit in the amount of $598,304 and a ten year term
expiring on November 2, 2009.
CAPITAL LEASES
The Company currently leases office furniture and equipment under
non-cancelable capital leases. The Company had $506,682, $5,366,972, and
$7,832,914, of assets held under capital leases at December 31, 1997, 1998 and
September 30, 1999, respectively. Amortization and depreciation related to
capital leased equipment is included in depreciation and amortization expense.
The future minimum lease payments under non-cancelable capital leases at
September 30, 1999 are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
- -----------
<S> <C>
Three months ended December 31, 1999........................ $ 931,683
2000........................................................ 2,872,983
2001........................................................ 1,196,531
2002........................................................ 357,137
2003........................................................ 15,850
-----------
Total minimum lease payments................................ $ 5,374,184
Less amount representing interest........................... (570,470)
-----------
Present value of minimum lease payments..................... 4,803,714
Less current portion of capital lease obligation............ (3,073,818)
-----------
Long term portion of capital lease obligation............... $ 1,729,896
===========
</TABLE>
F-13
<PAGE> 89
NET2000 COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. TAXES
The Company accounts for taxes under Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes ("SFAS 109"). Under SFAS 109,
deferred tax liabilities and assets are determined based on the difference
between the financial statement and tax basis of assets and liabilities using
enacted rates expected to be in effect during the year in which the differences
reverse.
For periods prior to October 31, 1997, the Company and its stockholders
were taxed as an S Corporation under the Internal Revenue Code. Under the
provisions of the tax code, the Company's stockholders include their pro rata
share of the Company's income in their personal income tax returns. Accordingly,
the Company was not subject to Federal or state income taxes during that period.
On October 31, 1997, the Company sold Redeemable Convertible Series A Preferred
Stock, which disqualified the S corporation election. From November 1, 1997
forward, the Company has been taxed as a C corporation.
At September 30, 1999, the Company had net operating losses of
approximately $42.5 million. The timing and manner in which the operating loss
carryforward may be utilized in any year by the Company will be limited to the
Company's ability to generate future earnings. Current net operating loss
carryforwards will begin expiring substantially in 2018. As the Company has not
generated earnings and no assurance can be made of future earnings needed to
utilize these net operating losses, a valuation allowance in the amount of the
net deferred tax asset has been recorded.
At December 31, 1997, 1998 and September 30, 1999, deferred taxes consist
of:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
----------------------- -------------
1997 1988 1999
---- ---- ----
<S> <C> <C> <C>
Tax Liability
Cash to accrual adjustment............. $(114,068) $ (85,461) $ (64,096)
Depreciation........................... -- (488,267) (2,656,545)
Capital lease.......................... -- (93,753) (566,126)
Tax Assets
Net operating loss carryforward........ 233,907 5,613,532 16,145,097
Capital leases......................... -- -- --
Allowance for bad debts................ 14,266 86,843 326,478
Deferred revenue....................... -- 178,843 184,735
Stock options.......................... -- 49,348 137,415
Other.................................. -- 6,350 18,395
--------- ----------- ------------
134,105 5,267,435 13,525,353
Valuation allowance.................... (134,105) (5,267,435) (13,525,353)
--------- ----------- ------------
Net deferred tax asset................... $ -- $ -- $ --
========= =========== ============
</TABLE>
The Company paid no income taxes for the years ended December 31, 1996,
1997, and 1998 or for the nine months ended September 30, 1999.
F-14
<PAGE> 90
NET2000 COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the items which cause the recorded income taxes to differ from
the statutory Federal income tax rate is as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998 DECEMBER 31, 1999
----------------- ----------------- -----------------
<S> <C> <C> <C>
Tax expense (benefit)
at statutory Federal
rate................. $(170,506) $(4,680,818) $(7,491,334)
Effect of:
State income tax,
net............. (30,084) (826,026) (1,322,000)
Stock option
compensation.... -- 24,591 90,438
Other.............. 66,485 348,920 464,978
Increase in
valuation
allowance....... 134,105 5,133,333 8,257,918
--------- ----------- -----------
Income tax expense... $ -- $ -- $ --
========= =========== ===========
</TABLE>
7. EQUITY
EQUITY TRANSACTIONS
On October 23, 1997, the Company reincorporated in Delaware pursuant to a
statutory merger of the Virginia corporation into a newly formed Delaware
corporation. On the merger date, each share of the prior Company's $1 par value
common stock was exchanged for 500 shares of $0.01 par value common stock of the
new Company. This transaction was accounted for as a stock split and the
accompanying financial statements have been restated to reflect this transaction
for all periods presented.
On October 31, 1997, the Company sold 4,087,592 shares of Redeemable
Convertible Series A Preferred Stock ("Series A Preferred Stock or Share") for
$0.856 per share. On May 19, 1998 the Company sold 5,510,535 shares of
Redeemable Convertible Series B Preferred Stock ("Series B Preferred Stock or
Share") for $3.085 per share. Both Series A and B Preferred Shares are
convertible into shares of common stock at a rate of 1:1.25. Both Preferred
issues have mandatory conversion in the event of an initial public offering. The
Series A and B Preferred Stock accrue a dividend of $0.069 and $0.309 per annum,
respectively, payable if and when declared, and are subject to certain
adjustments and limitations as defined in the purchase agreement. Should a
qualifying event (initial public offering or acquisition) be consummated prior
to the third anniversary of the Series A and B original issue dates, no
dividends, whether or not accrued, will be payable. At December 31, 1997, 1998
and for the nine months ended September 30, 1999, dividends in arrears were
$46,667, $1,374,868 and $2,863,467, respectively. Voting rights of both
Preferred issues are on an as if converted basis. The Series A and B Preferred
Shares have redemption rights at their respective fair values subject to certain
limitations, and certain antidilutive and future registration rights as defined
in the purchase agreement and other agreements. The Series B Preferred Stock
ranks senior and prior to the Series A Preferred Stock as to dividends and upon
a liquidation event as defined.
On May 19, 1998, the Board of Directors and stockholders of the Company
approved a 4 for 1 stock split of the Company's $0.01 par value voting common
stock. All references in the
F-15
<PAGE> 91
NET2000 COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
accompanying financial statements to the number of shares of common stock have
been restated to reflect the split.
On November 1, 1998 and pursuant to the recapitalization of the Company
discussed in Note 1-Organization, Net2000 Group, Inc. exchanged common shares
with the stockholders of the new parent company, Net2000 Communications, Inc.,
in a one-for-one transfer. In addition, the number of authorized shares of
common stock was increased from 28 million to 30 million.
On November 2, 1998, the Company sold 2,140,310 shares of Redeemable
Convertible Series C Preferred Stock ("Series C Preferred Stock or Share") for
$14.017 per share. Certain terms and conditions of the Series A and B agreements
were amended and restated as a result of the Series C Preferred Stock issuance
and are reflected herein. Each Series C Preferred Share is convertible into
shares of common stock at a rate of 1:1.25. The Series C Preferred Stock has a
mandatory conversion in the event of an initial public offering which has gross
proceeds of at least $50 million and at an IPO price of at least $6.40 per share
of common stock. The Series C Preferred Stock accrues a dividend of $1.121 per
annum, payable if and when declared, and subject to certain adjustments and
limitations as defined in the purchase agreement. At December 31, 1998 and for
the nine months ended September 30, 1999, dividends in arrears were $399,881 and
$2,199,345, respectively. Voting rights of the Series C Preferred Shares are on
an as if converted basis. The Series C Preferred Shares have redemption rights
at their fair values beginning on the later of one year after the maturity of
any high yield debt issued by the Company prior to December 31, 1999 or November
2, 2004; or in the case of an acquisition event, the 30 day period commencing
upon the receipt of notice of the acquisition event. The Series C Preferred
Shares have certain antidilutive and future registration rights as defined in
the agreement. The Series C Preferred Stock ranks senior and prior to the Series
B Stock as to dividends and upon a liquidation event as defined in the Company's
certificate of incorporation, as amended.
STOCK OPTION PLAN
During 1997, the Company adopted a stock option plan (the "Option Plan")
which allows the Company to grant up to 1,678,830 Common Stock options to
employees, board members and others who contribute materially to the success of
the Company. Individual grants generally become exercisable ratably over a
period of four years from the grant date. The contractual term of the options is
10 years from the date of grant. In November 1998, the number of stock options
reserved under the Option Plan was increased to 3,379,436. In September 1999,
the number of stock options reserved under the Option Plan was increased to
4,373,388.
The Company determines the fair value of its common stock used in its
accounting for stock option grants based on both arms length equity transactions
and independent valuations obtained during the period from the plan's inception
to September 30, 1999.
In December 1997, the Company issued 1,282,595 options to certain employees
at an exercise price of $0.14 which was below the fair market value at the time
of the option grant. During 1998, the Company issued 1,689,188 options to
certain employees at a weighted average exercise price of $0.622. The exercise
price for a portion of these option grants was below the fair market value of
the common stock at the grant date. For the nine months ended September 30,
1999, the Company issued 1,533,750 options to certain employees at an exercise
price of $3.40 and $5.60, which was below the fair market value at the time of
the option grant. Accordingly, the Company recorded deferred stock compensation
of $87,216, $137,940 and $2,305,860 in 1997, 1998, and for the nine months ended
September 30, 1999, respectively.
F-16
<PAGE> 92
NET2000 COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1998 and the nine months ended September 30, 1999, amortization
expense for stock based compensation was $63,054 and $231,893, respectively, and
relates to employees whose salaries are included in selling, general and
administrative expense.
Additional information with respect to the Option Plan is summarized as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, NINE MONTHS ENDED
--------------------------------------------- SEPTEMBER 30,
1997 1998 1999
--------------------- --------------------- ---------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
period............................ -- $ -- 1,282,595 $ 0.14 2,559,111 $0.418
Options granted................... 1,282,595 0.14 1,689,188 0.622 1,533,750 4.496
Options exercised................. -- -- (109,490) 0.685 (5,831) 0.14
Options canceled or expired....... -- -- (303,182) 0.285 (291,427) 0.852
--------- --------- --------- ------
Outstanding at end of period...... 1,282,595 $0.14 2,559,111 $0.418 3,795,603 $2.032
========= ========= ========= ======
Options exercisable at end of
period.......................... 62,956 $0.14 838,592 $0.322 1,254,261 $0.672
========= ========= ========= ======
</TABLE>
The following table summarizes information about stock options outstanding
at September 30, 1999:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 SEPTEMBER 30, 1999
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ -----------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL LIFE EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICE OUTSTANDING (IN YEARS) PRICE EXERCISABLE PRICE
- ----------------------- ----------- ---------------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Less than $0.80..................... 2,247,635 8.27 $0.37 1,143,795 $ 0.35
$0.81 to $3.20...................... 31,716 8.25 1.57 31,716 1.58
$3.21 to $5.60...................... 1,516,262 9.79 4.51 78,750 4.97
--------- ---------
3,795,603 8.90 $2.00 1,254,261 $ 0.67
========= =========
</TABLE>
Had compensation expense related to the stock option plans been determined
based on the fair value at the option grant dates consistent with the provisions
of SFAS No. 123, the Company's pro forma net loss and earnings per share would
have been as follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------ ---------------------------
1997 1998 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss available to common
shareholders -- pro forma...................... $(504,453) $(22,805,690) $(13,708,435) $(38,120,925)
Pro forma net loss per share................... $ (2.26) $ (3.77)
</TABLE>
The effect of applying SFAS 123 on the years ended December 31, 1997 and
1998, and the nine months ended September 30, 1998 and 1999 pro forma net loss
as stated above is not necessarily representative of the effects on reported net
loss for future years due to, among other things, the vesting period of the
stock options and the fair value of additional stock options granted in future
years.
F-17
<PAGE> 93
NET2000 COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing fair value model with the following
weighted-average assumptions used for all grants: volatility of 25%; dividend
yield of 0%; expected life of five years; and risk-free interest rate of 6.5%.
The weighted average fair values of the options granted in 1997 with a stock
price equal to the exercise price is $0.21. The weighted average fair values of
the options granted in 1998 with a stock price equal to the exercise price, with
a stock price less than the exercise price and with a stock price greater than
the exercise price are $3.40, $0.51 and $0.59 per share, respectively. The
weighted average fair values of the options granted in 1999 with a stock price
equal to the exercise price and with a stock price greater than the exercise
price are $3.40 and $6.50 per share, respectively.
SHAREHOLDER DISTRIBUTIONS
During 1997, the Company's board of directors approved and paid an S
Corporation distribution to shareholders in the amount of $845,000.
ACCRETION TO REDEMPTION VALUE OF CLASS A, CLASS B, AND C PREFERRED STOCK
For the year ended December 31, 1998 and the nine months ended September
30, 1999, the Company has accreted its preferred stock to their redemption value
based on the fair market value of the Company using the effective interest
method. The Company recorded accretion totaling $8,903,296 and $15,777,672 for
the year ended December 31, 1998 and the nine month period ended September 30,
1999, respectively.
8. COMMITMENTS
OPERATING LEASES
The Company currently leases office space and equipment under
non-cancelable operating leases. Rent expense for the years ended December 31,
1996, 1997, 1998 and for the nine months ending September 30, 1999 was $84,811,
$384,919, $894,273, and $1,545,066, respectively.
On May 26, 1999, the Company entered into a facilities lease agreement for
new headquarters office space and switch space. The leased premises consists of
126,276 of rentable square feet. The lease term date for the office space and
switch space leased premises begins on the earlier of 15 and 30 days,
respectively, after substantial completion of construction on the space or the
date the Company has commenced beneficial occupancy of the space; currently
anticipated to in mid-November. The lease term for the office space expires on
December 31, 2006. The lease term for the switch space expires on the tenth
anniversary of the switch space rent commencement date. Base annual rent for all
leased premises is $2,910,764 for years one through five, and $3,422,281 for
years six through ten, subject to additional rents for the Company's
proportional share of real property taxes and common expenses as defined in the
lease agreement.
F-18
<PAGE> 94
NET2000 COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The future minimum lease payments under non-cancelable operating leases at
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
- -----------
<S> <C>
Three months ended December 31, 1999................. $ 864,797
2000................................................. 5,277,452
2001................................................. 4,771,358
2002................................................. 4,397,488
2003................................................. 4,307,444
2004................................................. 3,957,589
Thereafter........................................... 13,389,675
-----------
Total...................................... $36,965,803
===========
</TABLE>
The Company has executed employment agreements with certain key executives
under which the Company is required to pay base salaries totaling $251,000 and
$1,048,000 during the remaining three months of 1999 and for the year 2000,
respectively.
9. SALE OF CONSULTING DIVISION
On October 27, 1997, the Company sold its consulting business to a
third-party purchaser in exchange for $875,000 in cash and a 20% equity interest
in the company into which the consulting business was merged. The Company
recorded its investment in this company at a nominal value and accounts for it
using the cost method. The Company and the purchaser entered into an agreement
whereby either party can require the sale of the remaining 20% of the business
to the other entity at any date after December 31, 1998. On July 29, 1999, the
purchaser exercised its option to acquire the remaining 20% of the business for
$64,448.
10. RELATED PARTY TRANSACTIONS
The Company maintains key-man life insurance policies for each of six
officers with aggregate coverage of $34,000,000. The Company paid $13,672,
$35,268 and $36,714 of premiums related to these policies during the year ended
December 31, 1997, 1998 and for the nine months ended September 30, 1999,
respectively.
11. SIGNIFICANT CUSTOMERS AND SUPPLIERS
The Company derived a significant portion of its sales from two major
customers during 1997 and 1998, and one major customer during 1996. For the
years ended December 31, 1996, 1997 and 1998 and the nine months ended September
30, 1999, the Company recorded sales of approximately $1,400,000, $2,795,000,
$2,861,000, and $0 respectively, from these customers. For the years ended
December 31, 1996, 1997 and 1998 the Company had accounts receivable of $307,000
$894,310 and $0, respectively, resulting from sales to these major customers.
On July 30, 1999, the Company and a major supplier of local
telecommunications resale services settled a dispute over claims that certain
acts and omissions by the supplier had an adverse impact on the Company's
ability to resell and earn revenue from the resale of local telecommunication
services. Net settlement proceeds to the Company totaled $5 million, of which
$1.5 million was utilized to offset impaired accounts receivable due to the
dispute and 3.5 million was recorded as a gain. In addition, the Company will be
entitled to compensation for future lost usage, which is recognized as earned as
the usage is accrued on the supplier's network, and is calculated in accordance
with the terms of the agreement, subject to audit by the supplier, and
F-19
<PAGE> 95
NET2000 COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
for a period commencing subsequent to the settlement date and for as long as the
Company and supplier are engaged in the resale of local telecommunication
services.
12. DEFINED CONTRIBUTION PLAN
The Company maintains a defined contribution plan (401(k) plan) covering
all employees who meet certain eligibility requirements. Participants may make
contributions to the plan up to 15% of their compensation (as defined) up to the
maximum established by law. The Company may make a matching contribution of an
amount to be determined by the Board of Directors, but subject to a maximum of
6% of compensation contributed by each participant. Company contributions vest
ratably over four years. Company contributions to the plan as of December 31,
1998 and for the nine months ended September 30, 1999 were $74,943 and $127,953,
respectively.
13. SUBSEQUENT EVENT
Subsequent to year end, the Board of Directors and stockholders of the
Company approved a stock dividend of 0.25 shares for each outstanding share of
common stock effective January 12, 1999. All references in the accompanying
financial statements to the number of shares of common stock and per share
amounts have been restated to reflect the dividend.
14. PRO FORMA ADJUSTMENTS (UNAUDITED)
The pro forma balance sheet as of September 30, 1999 reflects the
conversion of all classes of the Company's preferred stock into common stock as
of that date. The pro forma net income (loss) per share reflects the conversion
of all classes of the Company's preferred stock as of the respective date of
issuance.
15. SELECTED QUARTERLY INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1997
Revenues........................... $ 697,691 $ 714,178 $ 956,780 $ 1,175,580
Operating (loss) income............ (18,057) (243,826) (207,462) (848,833)
Net (loss) income.................. (27,226) (256,650) (217,980) 367
1998
Revenues........................... $ 1,652,033 $2,217,693 $ 2,048,232 $ 3,500,944
Operating (loss) income............ (994,529) (2,479,382) (4,832,126) (5,988,224)
Net (loss) income.................. (985,860) (2,398,776) (4,677,273) (5,705,203)
1999
Revenues........................... $ 5,056,729 $6,031,126 $ 7,581,941
Operating (loss) income............ (6,451,190) (8,647,418) (10,373,846)
Net (loss) income.................. (6,169,939) (8,544,731) (7,318,718)
</TABLE>
F-20
<PAGE> 96
------------------------------------------------------
------------------------------------------------------
No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You must
not rely on any unauthorized information or representations. This prospectus is
an offer to sell only the shares offered hereby, but only under circumstances
and in jurisdictions where it is lawful to do so. The information contained in
this prospectus is current only as of its date.
----------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................. 1
Risk Factors........................ 6
Use of Proceeds..................... 14
Dividend Policy..................... 14
Capitalization...................... 15
Dilution............................ 16
Selected Consolidated Financial And
Other Data........................ 17
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... 19
Business............................ 29
Government Regulation............... 46
Management.......................... 53
Certain Transactions................ 62
Principal Stockholders.............. 64
Description of our Capital Stock.... 66
Shares Eligible for Future Sale..... 70
Underwriting........................ 72
Validity of the Shares.............. 73
Experts............................. 73
Additional Information.............. 73
Index to Financial Statements....... F-1
</TABLE>
----------------------
Through and including , 2000 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to a dealer's obligation to deliver a prospectus when acting
as an underwriter and with respect to an unsold allotment or subscription.
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
10,000,000 Shares
NET2000
COMMUNICATIONS, INC.
Common Stock
----------------------
[LOGO]
----------------------
GOLDMAN, SACHS & CO.
DONALDSON, LUFKIN & JENRETTE
J.P. MORGAN & CO.
LEGG MASON WOOD WALKER
INCORPORATED
Representatives of the Underwriters
------------------------------------------------------
------------------------------------------------------
<PAGE> 97
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses payable by us in
connection with the sale and distribution of the securities offered hereby,
other than underwriting discounts and commissions. All of the amounts shown are
estimated except the Securities and Exchange Commission registration fee, the
National Association Securities Dealers, Inc. filing fee and the Nasdaq National
Market listing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 48,576
National Association of Securities Dealers, Inc. filing
fee....................................................... 18,900
Nasdaq National Market listing fee.......................... 95,000
Transfer agent's and registrar's fees....................... 2,000
Printing expenses........................................... 400,000
Legal fees and expenses..................................... 300,000
Accounting fees and expenses................................ 300,000
Blue Sky filing fees and expenses........................... 7,500
Miscellaneous expenses...................................... 28,024
----------
Total............................................. $1,200,000
==========
</TABLE>
- ---------------
* To be filed by amendment.
14. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Section 145 of the Delaware general corporation law ("Section 145") permits
indemnification of directors, officers, agents and controlling persons of a
corporation under certain conditions and subject to certain limitations. Our
bylaws include provisions to require us to indemnify our directors and officers
to the fullest extent permitted by Section 145, including circumstances in which
indemnification is otherwise discretionary. Section 145 also empowers us to
purchase and maintain insurance that protects our officers, directors, employees
and agents against any liabilities incurred in connection with their service in
such positions.
At present, there is no pending litigation or proceeding involving any of
our directors or officers as to which indemnification is being sought nor are we
aware of any threatened litigation that may result in claims for indemnification
by any officer or director.
The form of Underwriting Agreement filed as Exhibit 1.1 to this
Registration Statement provides for indemnification of our directors and
officers by the Underwriters, for certain liabilities arising under the
Securities Act.
15. RECENT SALES OF UNREGISTERED SECURITIES
During the last three years, we have issued unregistered securities in the
transactions described below. These securities were offered and sold by us in
reliance upon the exemptions provided for in Section 4(2) of the Securities Act,
relating to sales not involving any public offering, Rule 506 of the Securities
Act relating to sales to accredited investors and Rule 701 of the Securities Act
relating to a compensatory benefit plan. The sales were made without the use of
an underwriter and the certificates representing the securities sold contain a
restrictive legend that prohibits transfer without registration or an applicable
exemption.
(1) In October 1997, we issued 4,087,592 shares of series A preferred
stock to a group of accredited investors at a purchase price of $0.856 per
share for an aggregate purchase price of $3,500,000.
(2) In October 1997, we issued an option to one of our executive
officers for an aggregate of 87,592 shares of common stock at an exercise
price of $0.856 per share.
II-1
<PAGE> 98
(3) In October 1997, we issued an option to one of our executive
officers for an aggregate of 31,716 shares of common stock at an exercise
price of $1.577 per share.
(4) In May 1998, we issued 5,510,535 shares of series B preferred
stock to a group of accredited investors at a purchase price of $3.085 per
share for an aggregate purchase price of $17,000,000.
(5) In November 1998, we issued 2,140,310 shares of series C preferred
stock to one accredited investor at a purchase price of $14.017 per share
for an aggregate purchase price of $30,000,000.
(6) In July 1999, we issued a warrant to purchase 1,119,930 shares of
common stock to an accredited investor.
(7) Between December 1997 and February 1998, we issued options
exercisable for an aggregate of 1,720,335 shares of common stock at an
exercise price of $0.14 per share.
(8) Between March 1998 and May 1998, we issued options exercisable for
an aggregate of 234,120 shares of common stock at an exercise price of
$0.37 per share.
(9) Between May 1998 and September 1998, we issued options exercisable
for an aggregate of 833,935 shares of common stock at an exercise price of
$0.76 per share.
(10) Between December 1998 and July 1999, we issued options
exercisable for an aggregate of 812,187 shares of common stock at an
exercise price of $3.40 per share.
(11) Between September 1999 and December 1999, we issued options
exercisable for an aggregate of 760,625 shares of common stock at an
exercise price of $5.60 per share.
(12) In November 1999, we issued an option to our president for an
aggregate of 343,750 shares of common stock at an exercise price of $3.20
per share.
(13) In November 1999, we issued an option to our chief financial
officer for an aggregate of 56,250 shares of common stock at an exercise
price of $3.20 per share.
16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
1.1 Form of Underwriting Agreement
3.1* Restated Certificate of Incorporation of Net2000 dated
November 4, 1998
3.1.1* Certificate of Amendment to Restated Certificate of
Incorporation of Net2000 dated December 2, 1999
3.1.2 Form of Amended and Restated Certificate of Incorporation of
Net2000 (to be effective immediately after the closing of
this offering)
3.1.3* Bylaws of Net2000
3.1.4 Form of Amended and Restated Bylaws of Net2000 (to be
effective immediately after the closing of this offering)
4.1* Specimen stock certificate for shares of common stock of
Net2000
5.1 Opinion of Piper Marbury Rudnick & Wolfe LLP, regarding
legality of securities being registered
10.1* Second Amended and Restated Investor Rights Agreement dated
November 4, 1998, by and among Net2000 and certain
stockholders named therein
10.2* Employment Agreement dated July 31, 1998, by and between
Net2000 and Clayton A. Thomas, Jr.
10.3* Employment Agreement dated July 31, 1998, by and between
Net2000 and Mark A. Mendes
</TABLE>
II-2
<PAGE> 99
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
10.4* Employment Agreement dated July 31, 1998, by and between
Net2000 and Donald E. Clarke
10.5* Employment Agreement dated July 31, 1998, by and between
Net2000 and Bruce Bednarski
10.6* Employment Agreement dated July 31, 1998, by and between
Net2000 and Peter Callowhill
10.7 Employment Agreement dated November 15, 1999, by and between
Net2000 and Clyde Heintzelman
10.8* 1997 Equity Incentive Plan
10.9* 1999 Stock Incentive Plan
10.10* 1999 Employee Stock Purchase Plan
10.11* Incentive Stock Option Agreement dated October 27, 1997, by
and between Net2000 and Mark A. Mendes
10.11.1* Preferred Stock Incentive Stock Option Agreement dated
October 27, 1997, by and between Net2000 and Mark A. Mendes
10.11.2* Amendment No. 1 to Preferred Stock Incentive Stock Option
Agreement dated April 1, 1998 (related to Exhibit 10.11.1)
10.11.3* Incentive Stock Option Agreement dated May 19, 1998, by and
between Net2000 and Mark A. Mendes
10.12* Incentive Stock Option Agreement dated December 15, 1997 by
and between Net2000 and Donald E. Clarke
10.12.1* Incentive Stock Option Agreement dated May 19, 1998 by and
between Net2000 and Donald E. Clarke
10.12.2 Incentive Stock Option Agreement dated November 10, 1999, by
and between Net2000 and Donald E. Clarke
10.13** Stock Option Agreement dated November , 1999, by and
between Net2000 and Clyde Heintzelman
10.14* Amended and Restated Credit Agreement dated July 30, 1999,
by and among Net2000 Communications Group, Inc., Nortel
Networks Inc. and certain lenders named therein
10.14.1** First Amendment dated as of December 23, 1999 to the Amended
and Restated Credit Agreement dated July 30, 1999, by and
among Net2000 Communications Group, Inc., Nortel Networks
Inc. and certain lenders named therein
10.15* Form of Amended and Restated Guaranty Agreement dated July
30, 1999, signed by each of our subsidiaries and Nortel
Networks Inc.
10.16* Form of Amended and Restated Pledge and Security Agreement
dated July 30, 1999, signed by each of our subsidiaries and
Nortel Networks Inc.
10.17* Note Purchase Agreement dated July 30, 1999, by and between
Net2000 and Nortel Networks Inc.
10.17.1* First Amendment dated as of December 31, 1999 to the Note
Purchase Agreement dated July 30, 1999, by and between
Net2000 and Nortel Networks Inc.
10.18* Warrant Agreement dated July 30, 1999, by and between
Net2000 and Nortel Networks Inc.
10.19* Form of Warrant Certificate dated July 30, 1999, by and
between Net2000 and Nortel Networks Inc.
10.20* Senior Discount Notes Due 2009 issued by Net2000 on July 30,
1999 to the holder identified therein
10.21* Exchange and Registration Rights Agreement dated July 30,
1999, by and between Net2000 and Nortel Networks Inc.
10.22* Lease dated December 24, 1998, by and between Net2000
Communications Real Estate, Inc. and Wellsford/Whitehall
Holdings, L.L.C.
10.23* Lease dated February 19, 1999, by and between Net2000
Communications Real Estate, Inc. and Murdock Atrium Limited
Partnership
</TABLE>
II-3
<PAGE> 100
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
10.24* Sublease Agreement dated June 21, 1999, by and between
Net2000 Communications Real Estate, Inc. and Virginia
Electric and Power Company
10.25* Office Lease dated May 26, 1999, by and between Net2000
Communications Real Estate, Inc. and KDC-Dulles Tech, LLC
10.26 Letter of Intent dated January 7, 2000, by and between
Net2000 and Access One Communications Corp.
21* Subsidiaries of Net2000
23.1 Consent of Ernst & Young, LLP
23.2 Consent of Piper Marbury Rudnick & Wolfe LLP (included as
part of Exhibit 5.1 hereto)
24.1* Power of Attorney (included in signature pages)
27 Financial Data Schedule
</TABLE>
- ---------------
* Previously filed.
** To be filed by amendment.
(b) Financial Statement Schedules:
Schedules have been omitted because the information required to be shown in
the schedules is not applicable or is included elsewhere in our financial
statements or the notes thereto.
17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the underwriter
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions of its Charter or Bylaws or the Delaware
General corporation Law or otherwise, the Registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted form the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 101
SIGNATURES
Pursuant to the requirements of the Securities Act, the Company has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Herndon, Virginia, on the
13th day of January, 2000.
NET2000 Communications, Inc.
By: /s/ CLAYTON A. THOMAS, JR.
------------------------------------
Clayton A. Thomas, Jr.
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment to Registration Statement has been signed below by the following
persons in the capacities and on the date indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ CLAYTON A. THOMAS, JR. Chairman of the Board and January 13, 2000
- ----------------------------------------------------- Chief Executive Officer
Clayton A. Thomas, Jr. (Principal Executive
Officer)
* President and Director January 13, 2000
- -----------------------------------------------------
Clyde Heintzelman
/s/ DONALD E. CLARKE Executive Vice President, January 13, 2000
- ----------------------------------------------------- Chief Financial Officer
Donald E. Clarke and Treasurer (Principal
Accounting and Financial
Officer)
* Director January 13, 2000
- -----------------------------------------------------
Peter B. Callowhill
* Director January 13, 2000
- -----------------------------------------------------
Eric Geis
* Director January 13, 2000
- -----------------------------------------------------
Reid Miles
* Director January 13, 2000
- -----------------------------------------------------
Mitchell Reese
*By: /s/ NANCY A. SPANGLER
------------------------------------------------
Nancy A. Spangler
Attorney-In-Fact
</TABLE>
II-5
<PAGE> 102
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
<S> <C>
1.1 Form of Underwriting Agreement
3.1* Restated Certificate of Incorporation of Net2000 dated
November 4, 1998
3.1.1* Certificate of Amendment to Restated Certificate of
Incorporation of Net2000 dated December 2, 1999
3.1.2 Form of Amended and Restated Certificate of Incorporation of
Net2000 (to be effective immediately after the closing of
this offering)
3.1.3* Bylaws of Net2000
3.1.4 Form of Amended and Restated Bylaws of Net2000 (to be
effective immediately after the closing of this offering)
4.1* Specimen stock certificate for shares of common stock of
Net2000
5.1 Opinion of Piper Marbury Rudnick & Wolfe LLP, regarding
legality of securities being registered
10.1* Second Amended and Restated Investor Rights Agreement dated
November 4, 1998, by and among Net2000 and certain
stockholders named therein
10.2* Employment Agreement dated July 31, 1998, by and between
Net2000 and Clayton A. Thomas, Jr.
10.3* Employment Agreement dated July 31, 1998, by and between
Net2000 and Mark A. Mendes
10.4* Employment Agreement dated July 31, 1998, by and between
Net2000 and Donald E. Clarke
10.5* Employment Agreement dated July 31, 1998, by and between
Net2000 and Bruce Bednarski
10.6* Employment Agreement dated July 31, 1998, by and between
Net2000 and Peter Callowhill
10.7 Employment Agreement dated November 15, 1999, by and between
Net2000 and Clyde Heintzelman
10.8* 1997 Equity Incentive Plan
10.9* 1999 Stock Incentive Plan
10.10* 1999 Employee Stock Purchase Plan
10.11* Incentive Stock Option Agreement dated October 27, 1997, by
and between Net2000 and Mark A. Mendes
10.11.1* Preferred Stock Incentive Stock Option Agreement dated
October 27, 1997, by and between Net2000 and Mark A. Mendes
10.11.2* Amendment No. 1 to Preferred Stock Incentive Stock Option
Agreement dated April 1, 1998 (related to Exhibit 10.11.1)
10.11.3* Incentive Stock Option Agreement dated May 19, 1998, by and
between Net2000 and Mark A. Mendes
10.12* Incentive Stock Option Agreement dated December 15, 1997 by
and between Net2000 and Donald E. Clarke
10.12.1* Incentive Stock Option Agreement dated May 19, 1998 by and
between Net2000 and Donald E. Clarke
10.12.2 Incentive Stock Option Agreement dated November 10, 1999, by
and between Net2000 and Donald E. Clarke
</TABLE>
<PAGE> 103
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
- -------------- -----------
<S> <C>
10.13** Stock Option Agreement dated November , 1999, by and
between Net2000 and Clyde Heintzelman
10.14* Amended and Restated Credit Agreement dated July 30, 1999,
by and among Net2000 Communications Group, Inc., Nortel
Networks Inc. and certain lenders named therein
10.14.1** First Amendment dated as of December 23, 1999 to the Amended
and Restated Credit Agreement dated July 30, 1999, by and
among Net2000 Communications Group, Inc., Nortel Networks
Inc. and certain lenders named therein.
10.15* Form of Amended and Restated Guaranty Agreement dated July
30, 1999, signed by each of our subsidiaries and Nortel
Networks Inc.
10.16* Form of Amended and Restated Pledge and Security Agreement
dated July 30, 1999, signed by each of our subsidiaries and
Nortel Networks Inc.
10.17* Note Purchase Agreement dated July 30, 1999, by and between
Net2000 and Nortel Networks Inc.
10.17.1** First Amendment dated as of December 23, 1999 to the Note
Purchase Agreement dated July 30, 1999, by and between
Net2000 and Nortel Networks Inc.
10.18* Warrant Agreement dated July 30, 1999, by and between
Net2000 and Nortel Networks Inc.
10.19* Form of Warrant Certificate dated July 30, 1999, by and
between Net2000 and Nortel Networks Inc.
10.20* Senior Discount Notes Due 2009 issued by Net2000 on July 30,
1999 to the holder identified therein
10.21* Exchange and Registration Rights Agreement dated July 30,
1999, by and between Net2000 and Nortel Networks Inc.
10.22* Lease dated December 24, 1998, by and between Net2000
Communications Real Estate, Inc. and Wellsford/Whitehall
Holdings, L.L.C.
10.23* Lease dated February 19, 1999, by and between Net2000
Communications Real Estate, Inc. and Murdock Atrium Limited
Partnership
10.24* Sublease Agreement dated June 21, 1999, by and between
Net2000 Communications Real Estate, Inc. and Virginia
Electric and Power Company
10.25* Office Lease dated May 26, 1999, by and between Net2000
Communications Real Estate, Inc. and KDC-Dulles Tech, LLC
10.26 Letter of Intent dated January 7, 2000, by and between
Net2000 and Access One Communications Corp.
21* Subsidiaries of Net2000
23.1 Consent of Ernst & Young, LLP
23.2 Consent of Piper Marbury Rudnick & Wolfe LLP (included as
part of Exhibit 5.1 hereto)
24.1* Power of Attorney (included in signature pages)
27 Financial Data Schedule
</TABLE>
- ---------------
* Previously filed.
** To be filed by amendment.
<PAGE> 1
EXHIBIT 1.1
L&W DRAFT 1/6/00
NET2000 COMMUNICATIONS, INC.
COMMON STOCK
---------------
UNDERWRITING AGREEMENT
___________, 2000
Goldman, Sachs & Co.,
Donaldson, Lufkin & Jenrette Securities Corporation,
J.P. Morgan Securities Inc.,
Legg Mason Wood Walker, Incorporated
As representatives of the several Underwriters
named in Schedule I hereto,
c/o Goldman, Sachs & Co.,
85 Broad Street,
New York, New York 10004.
Ladies and Gentlemen:
Net2000 Communications, Inc., a Delaware corporation (the
"Company"), proposes, subject to the terms and conditions stated herein, to
issue and sell to the Underwriters named in Schedule I hereto (the
"Underwriters") an aggregate of ........ shares (the "Firm Shares") and, at the
election of the Underwriters, up to ........ additional shares (the "Optional
Shares") of Common Stock ("Stock") of the Company (the Firm Shares and the
Optional Shares that the Underwriters elect to purchase pursuant to Section 2
hereof being collectively called the "Shares").
1. The Company represents and warrants to, and agrees with, each of
the Underwriters that:
(a) A registration statement on Form S-1 (File No. 333-....) (the
"Initial Registration Statement") in respect of the Shares has been filed with
the Securities and Exchange Commission (the "Commission"); the Initial
Registration Statement and any post-effective amendment thereto, each in the
form heretofore delivered to you, and, excluding exhibits thereto, to you for
each of the other Underwriters, have been declared effective by the Commission
in such form; other than a registration statement, if any, increasing the size
of the offering (a "Rule 462(b) Registration Statement"), filed pursuant to Rule
462(b) under the Securities Act of 1933, as amended (the "Act"), which became
effective upon filing, no other document with respect to the Initial
Registration Statement has heretofore been filed with the Commission; and no
stop order suspending the effectiveness of the Initial Registration Statement,
any post-effective amendment thereto or the Rule 462(b) Registration Statement,
if any, has been issued and no proceeding for that purpose has been initiated or
threatened by the Commission (any preliminary prospectus included in the Initial
Registration Statement or filed with the Commission pursuant to Rule 424(a) of
the rules and
1
<PAGE> 2
regulations of the Commission under the Act is hereinafter called a "Preliminary
Prospectus"; the various parts of the Initial Registration Statement and the
Rule 462(b) Registration Statement, if any, including all exhibits thereto and
including the information contained in the form of final prospectus filed with
the Commission pursuant to Rule 424(b) under the Act in accordance with Section
5(a) hereof and deemed by virtue of Rule 430A under the Act to be part of the
Initial Registration Statement at the time it was declared effective, each as
amended at the time such part of the Initial Registration Statement became
effective or such part of the Rule 462(b) Registration Statement, if any, became
or hereafter becomes effective, are hereinafter collectively called the
"Registration Statement"; and such final prospectus, in the form first filed
pursuant to Rule 424(b) under the Act, is hereinafter called the "Prospectus";
(b) No order preventing or suspending the use of any Preliminary
Prospectus has been issued by the Commission, and each Preliminary Prospectus,
at the time of filing thereof, conformed in all material respects to the
requirements of the Act and the rules and regulations of the Commission
thereunder, and did not contain an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that this representation and warranty
shall not apply to any statements or omissions made in reliance upon and in
conformity with information furnished in writing to the Company by an
Underwriter through Goldman, Sachs & Co. expressly for use therein;
(c) The Registration Statement conforms, and the Prospectus and any
further amendments or supplements to the Registration Statement or the
Prospectus will conform, in all material respects to the requirements of the Act
and the rules and regulations of the Commission thereunder and do not and will
not, as of the applicable effective date as to the Registration Statement and
any amendment thereto, and as of the applicable filing date as to the Prospectus
and any amendment or supplement thereto, contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; provided, however, that
this representation and warranty shall not apply to any statements or omissions
made in reliance upon and in conformity with information furnished in writing to
the Company by an Underwriter through Goldman, Sachs & Co. expressly for use
therein;
(d) Neither the Company nor any of its subsidiaries has sustained since
the date of the latest audited financial statements included in the Prospectus
any material loss or interference with its business from fire, explosion, flood
or other calamity, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree, otherwise than as set
forth or contemplated in the Prospectus; and, since the respective dates as of
which information is given in the Registration Statement and the Prospectus,
there has not been any change in the capital stock or long-term debt of the
Company or any of its subsidiaries (other than in connection with the grant or
exercise of options or the conversion of securities pursuant to the terms
thereof) or any material adverse change, or any development involving a
prospective material adverse change, in or affecting the general affairs,
management, financial position, stockholders' equity or results of operations of
the Company and its subsidiaries taken as a whole, otherwise than as set forth
or contemplated in the Prospectus;
(e) The Company and its subsidiaries, who do not own any real property,
have good and marketable title to all personal property owned by them, free and
clear of all liens, encumbrances and defects except such as are described in the
Prospectus or such as do not materially affect the value
2
<PAGE> 3
of such property and do not interfere with the use made and proposed to be made
of such property by the Company and its subsidiaries; and any material real
property and buildings held under lease by the Company and its subsidiaries are
held by them under valid, subsisting and enforceable leases with such exceptions
as are not material and do not interfere with the use made and proposed to be
made of such property and buildings by the Company and its subsidiaries;
(f) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Delaware, with power
and authority (corporate and other) to own its properties and conduct its
business as described in the Prospectus, and has been duly qualified as a
foreign corporation for the transaction of business and is in good standing
under the laws of each other jurisdiction in which it owns or leases properties
or conducts any business so as to require such qualification, or is subject to
no material liability or disability by reason of the failure to be so qualified
in any such jurisdiction; and each subsidiary of the Company has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of its jurisdiction of incorporation;
(g) The Company has an authorized capitalization as set forth in the
Prospectus, and all of the issued shares of capital stock of the Company have
been duly and validly authorized and issued, are fully paid and non-assessable
and conform to the description of the Stock contained in the Prospectus; and all
of the issued shares of capital stock of each subsidiary of the Company have
been duly and validly authorized and issued, are fully paid and non-assessable
and (except for directors' qualifying shares and except as set forth in the
Prospectus) are owned directly or indirectly by the Company, free and clear of
all liens, encumbrances, equities or claims;
(h) The unissued Shares to be issued and sold by the Company to the
Underwriters hereunder have been duly and validly authorized and, when issued
and delivered against payment therefor as provided herein, will be duly and
validly issued and fully paid and non-assessable and will conform to the
description of the Stock contained in the Prospectus;
(i) The issue and sale of the Shares by the Company and the compliance by
the Company with all of the provisions of this Agreement and the consummation of
the transactions herein contemplated will not conflict with or result in a
breach or violation of any of the terms or provisions of, or constitute a
default under, any indenture, mortgage, deed of trust, loan agreement or other
material agreement or material instrument to which the Company or any of its
subsidiaries is a party or by which the Company or any of its subsidiaries is
bound or to which any of the property or assets of the Company or any of its
subsidiaries is subject, nor will such action result in any violation of the
provisions of (i) the Certificate of Incorporation or By-laws of the Company or
(ii) any statute or any order, rule or regulation (including, without
limitation, the Communications Act of 1934, as amended by the Telecommunications
Act of 1996, and the rules and regulations of the Federal Communications
Commission (the "FCC")) of any court or governmental agency or body having
jurisdiction over the Company or any of its subsidiaries or any of their
properties except, in the case of sub-paragraph (ii), where such violation would
not have a material adverse effect on the current or future consolidated
financial position, stockholders' equity, business prospects or results of
operations of the Company and its subsidiaries taken as a whole; and no consent,
approval, authorization, order, filing, registration or qualification of or with
any such court or governmental agency or body is required for the issue and sale
of the Shares or the consummation by the Company of the transactions
contemplated by this Agreement, except the registration under the Act of the
Shares and such consents, approvals, authorizations, registrations or
qualifications as may be
3
<PAGE> 4
required under state securities or Blue Sky laws in connection with the purchase
and distribution of the Shares by the Underwriters;
(j) Neither the Company nor any of its subsidiaries is in violation of
its Certificate of Incorporation or By-laws or in default in the performance or
observance of any material obligation, agreement, covenant or condition
contained in any indenture, mortgage, deed of trust, loan agreement, lease or
other agreement or instrument to which it is a party or by which it or any of
its properties may be bound;
(k) The statements set forth in the Prospectus under the caption
"Description of Our Capital Stock", insofar as they purport to constitute a
summary of the terms of the Stock, and under the caption "Underwriting", insofar
as they purport to describe the provisions of the laws and documents referred to
therein, are accurate, complete and fair;
(l) Other than as set forth in the Prospectus, there are no legal or
governmental proceedings pending to which the Company or any of its subsidiaries
is a party or of which any property of the Company or any of its subsidiaries is
the subject which, if determined adversely to the Company or any of its
subsidiaries, would individually or in the aggregate have a material adverse
effect on the current or future consolidated financial position, stockholders'
equity or results of operations of the Company and its subsidiaries taken as a
whole; and, to the best of the Company's knowledge, no such proceedings are
threatened or contemplated by governmental authorities or threatened by others;
(m) The Company is not and, after giving effect to the offering and sale
of the Shares, will not be an "investment company", as such term is defined in
the Investment Company Act of 1940, as amended (the "Investment Company Act");
(n) Neither the Company nor any of its affiliates does business with the
government of Cuba or with any person or affiliate located in Cuba within the
meaning of Section 517.075, Florida Statutes;
(o) Ernst & Young LLP, who have certified certain financial statements of
the Company and its subsidiaries, are independent public accountants as required
by the Act and the rules and regulations of the Commission thereunder;
(p) The Company has reviewed its operations and that of its subsidiaries
and any third parties with which the Company or any of its subsidiaries has a
material relationship to evaluate the extent to which the business or operations
of the Company or any of its subsidiaries will be affected by the Year 2000
Problem. As a result of such review, the Company has no reason to believe, and
does not believe, that the Year 2000 Problem will have a material adverse effect
on the current or future consolidated financial position, business prospects,
stockholders' equity or results of operations of the Company and its
subsidiaries or result in any material loss or interference with the Company's
business or operations. The "Year 2000 Problem" as used herein means any
significant risk that computer hardware or software used in the receipt,
transmission, processing, manipulation, storage, retrieval, retransmission or
other utilization of data or in the operation of mechanical or electrical
systems of any kind will not, in the case of dates or time periods occurring
after December 31, 1999, function at least as effectively as in the case of
dates or time periods occurring prior to January 1, 2000;
(q) Except as described in the Prospectus, the Company and its
subsidiaries possess all licenses, certificates, authorizations, authorities or
permits issued by, or have made all declarations,
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registrations or filings with, appropriate governmental agencies
or bodies (including, without limitation, the FCC and applicable
state regulatory authorities ("State Commissions")) necessary to
conduct the business now operated by them and as stated in the
Prospectus, have not received any notice of proceedings relating
to the revocation or modification of any such license,
certificate, authorization, authority or permit that, if
determined adversely to the Company or the subsidiary, would
individually or in the aggregate have a material adverse effect
and has no reason to believe that any such license, certificate,
authorization, authority or permit will not be renewed in the
ordinary course; each such license, certificate, authorization,
authority or permit is in full force and effect, and is issued to
the entity that is providing the service covered by such license,
certificate, authorization, authority, or permit; and
(r) The Company and its subsidiaries have filed, when due, all reports
required to be filed with the FCC and applicable State Commissions, except to
the extent that failure to file such reports would not have a material adverse
effect.
2. Subject to the terms and conditions herein set forth, (a) the Company
agrees to issue and sell to each of the Underwriters, and each of the
Underwriters agrees, severally and not jointly, to purchase from the Company, at
a purchase price per share of $................, the number of Firm Shares set
forth opposite the name of such Underwriter in Schedule I hereto and (b) in the
event and to the extent that the Underwriters shall exercise the election to
purchase Optional Shares as provided below, the Company agrees to issue and sell
to each of the Underwriters, and each of the Underwriters agrees, severally and
not jointly, to purchase from the Company, at the purchase price per share set
forth in clause (a) of this Section 2, that portion of the number of Optional
Shares as to which such election shall have been exercised (to be adjusted by
you so as to eliminate fractional shares) determined by multiplying such number
of Optional Shares by a fraction, the numerator of which is the maximum number
of Optional Shares which such Underwriter is entitled to purchase as set forth
opposite the name of such Underwriter in Schedule I hereto and the denominator
of which is the maximum number of Optional Shares that all of the Underwriters
are entitled to purchase hereunder.
The Company hereby grants to the Underwriters the right to purchase at
their election up to ................... Optional Shares, at the purchase price
per share set forth in the paragraph above, for the sole purpose of covering
sales of shares in excess of the number of Firm Shares. Any such election to
purchase Optional Shares may be exercised only by written notice from you to the
Company, given within a period of 30 calendar days after the date of this
Agreement, setting forth the aggregate number of Optional Shares to be purchased
and the date on which such Optional Shares are to be delivered, as determined by
you but in no event earlier than the First Time of Delivery (as defined in
Section 4 hereof) or, unless you and the Company otherwise agree in writing,
earlier than two or later than ten business days after the date of such notice.
3. Upon the authorization by you of the release of the Firm Shares, the
several Underwriters propose to offer the Firm Shares for sale upon the terms
and conditions set forth in the Prospectus.
4. (a) The Shares to be purchased by each Underwriter hereunder, in
definitive form, and in such authorized denominations and registered in
such names as Goldman, Sachs & Co. may request upon at least forty-eight
hours' prior notice to the Company shall be delivered by or on behalf of
the Company to Goldman, Sachs & Co., through the facilities of the
Depository
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<PAGE> 6
Trust Company ("DTC"), for the account of such Underwriter, against
payment by or on behalf of such Underwriter of the purchase price
therefor by wire transfer of Federal (same-day) funds to the account
specified by the Company to Goldman, Sachs & Co. at least forty-eight
hours in advance. The Company will cause the certificates representing
the Shares to be made available for checking and packaging at least
twenty-four hours prior to the Time of Delivery (as defined below) with
respect thereto at the office of DTC or its designated custodian (the
"Designated Office"). The time and date of such delivery and payment
shall be, with respect to the Firm Shares, 9:30 a.m., New York City time,
on ............., 2000 or such other time and date as Goldman, Sachs &
Co. and the Company may agree upon in writing, and, with respect to the
Optional Shares, 9:30 a.m., New York time, on the date specified by
Goldman, Sachs & Co. in the written notice given by Goldman, Sachs & Co.
of the Underwriters' election to purchase such Optional Shares, or such
other time and date as Goldman, Sachs & Co. and the Company may agree
upon in writing. Such time and date for delivery of the Firm Shares is
herein called the "First Time of Delivery", such time and date for
delivery of the Optional Shares, if not the First Time of Delivery, is
herein called the "Second Time of Delivery", and each such time and date
for delivery is herein called a "Time of Delivery".
(b) The documents to be delivered at each Time of Delivery by or
on behalf of the parties hereto pursuant to Section 7 hereof, including
the cross receipt for the Shares and any additional documents requested
by the Underwriters pursuant to Section 7(l) hereof, will be delivered
at the offices of Latham & Watkins, 885 Third Avenue, New York, New York
10022 (the "Closing Location"), and the Shares will be delivered at the
Designated Office, all at such Time of Delivery. A meeting will be held
at the Closing Location at .......p.m., New York City time, on the New
York Business Day next preceding such Time of Delivery, at which meeting
the final drafts of the documents to be delivered pursuant to the
preceding sentence will be available for review by the parties hereto.
For the purposes of this Section 4, "New York Business Day" shall mean
each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day
on which banking institutions in New York are generally authorized or
obligated by law or executive order to close.
5. The Company agrees with each of the Underwriters:
(a) To prepare the Prospectus in a form approved by you and to
file such Prospectus pursuant to Rule 424(b) under the Act not later than
the Commission's close of business on the second business day following
the execution and delivery of this Agreement, or, if applicable, such
earlier time as may be required by Rule 430A(a)(3) under the Act; to make
no further amendment or any supplement to the Registration Statement or
Prospectus which shall be disapproved by you promptly after reasonable
notice thereof; to advise you, promptly after it receives notice thereof,
of the time when any amendment to the Registration Statement has been
filed or becomes effective or any supplement to the Prospectus or any
amended Prospectus has been filed and to furnish you with copies thereof;
to advise you, promptly after it receives notice thereof, of the issuance
by the Commission of any stop order or of any order preventing or
suspending the use of any Preliminary Prospectus or prospectus, of the
suspension of the qualification of the Shares for offering or sale in any
jurisdiction, of the initiation or threatening of any proceeding for any
such purpose, or of any request by the Commission for the amending or
supplementing of the Registration Statement or Prospectus or for
additional information; and, in the event of the issuance of any stop
order
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or of any order preventing or suspending the use of any Preliminary
Prospectus or prospectus or suspending any such qualification, promptly
to use its best efforts to obtain the withdrawal of such order;
(b) Promptly from time to time to take such action as you may
reasonably request to qualify the Shares for offering and sale under the
securities laws of such jurisdictions as you may request and to comply
with such laws so as to permit the continuance of sales and dealings
therein in such jurisdictions for as long as may be necessary to complete
the distribution of the Shares, provided that in connection therewith the
Company shall not be required to qualify as a foreign corporation or to
file a general consent to service of process in any jurisdiction;
(c) Prior to 10:00 A.M., New York City time, on the New York
Business Day next succeeding the date of this Agreement and from time to
time, to furnish the Underwriters with copies of the Prospectus in New
York City in such quantities as you may reasonably request, and, if the
delivery of a prospectus is required at any time prior to the expiration
of nine months after the time of issue of the Prospectus in connection
with the offering or sale of the Shares and if at such time any event
shall have occurred as a result of which the Prospectus as then amended
or supplemented would include an untrue statement of a material fact or
omit to state any material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made
when such Prospectus is delivered, not misleading, or, if for any other
reason it shall be necessary during such period to amend or supplement
the Prospectus in order to comply with the Act, to notify you and upon
your request to prepare and furnish without charge to each Underwriter
and to any dealer in securities as many copies as you may from time to
time reasonably request of an amended Prospectus or a supplement to the
Prospectus which will correct such statement or omission or effect such
compliance, and in case any Underwriter is required to deliver a
prospectus in connection with sales of any of the Shares at any time nine
months or more after the time of issue of the Prospectus, upon your
request but at the expense of such Underwriter, to prepare and deliver to
such Underwriter as many copies as you may request of an amended or
supplemented Prospectus complying with Section 10(a)(3) of the Act;
(d) To make generally available to its securityholders as soon as
practicable, but in any event not later than eighteen months after the
effective date of the Registration Statement (as defined in Rule 158(c)
under the Act), an earnings statement of the Company and its subsidiaries
(which need not be audited) complying with Section 11(a) of the Act and
the rules and regulations thereunder (including, at the option of the
Company, Rule 158);
(e) During the period beginning from the date hereof and
continuing to and including the date 180 days after the date of the
Prospectus, not to offer, sell, contract to sell or otherwise dispose of,
except as provided hereunder any securities of the Company that are
substantially similar to the Shares, including but not limited to any
securities that are convertible into or exchangeable for, or that
represent the right to receive, Stock or any such substantially similar
securities (other than pursuant to employee stock option plans existing
on, or upon the conversion or exchange of convertible or exchangeable
securities outstanding as of, the date of this Agreement), without your
prior written consent;
(f) To furnish to its stockholders as soon as practicable after
the end of each fiscal year an annual report (including a balance sheet
and statements of income, stockholders' equity
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and cash flows of the Company and its consolidated subsidiaries certified
by independent public accountants) and, as soon as practicable after the
end of each of the first three quarters of each fiscal year (beginning
with the fiscal quarter ending after the effective date of the
Registration Statement), to make available to its stockholders
consolidated summary financial information of the Company and its
subsidiaries for such quarter in reasonable detail;
(g) During a period of three years from the effective date of the
Registration Statement, to furnish to you copies of all reports or other
communications (financial or other) furnished to stockholders, and to
deliver to you (i) as soon as they are available, copies of any reports
and financial statements furnished to or filed with the Commission or any
national securities exchange on which any class of securities of the
Company is listed; and (ii) such additional information concerning the
business and financial condition of the Company as you may from time to
time reasonably request (such financial statements to be on a
consolidated basis to the extent the accounts of the Company and its
subsidiaries are consolidated in reports furnished to its stockholders
generally or to the Commission); and during a period of more than three
years from the effective date of the Registration Statement but less than
five years from the effective date of the Registration Statement, to make
available to you copies of all such reports or communications, or
additional information, described above in this section;
(h) To use the net proceeds received by it from the sale of the
Shares pursuant to this Agreement in the manner specified in the
Prospectus under the caption "Use of Proceeds";
(i) To use its best efforts to list for quotation the Shares on
the National Association of Securities Dealers Automated Quotations
National Market System ("NASDAQ");
(j) To file with the Commission such information on Form 10-Q or
Form 10-K as may be required by Rule 463 under the Act; and
(k) If the Company elects to rely upon Rule 462(b), the Company
shall file a Rule 462(b) Registration Statement with the Commission in
compliance with Rule 462(b) by 10:00 P.M., Washington, D.C. time, on the
date of this Agreement, and the Company shall at the time of filing
either pay to the Commission the filing fee for the Rule 462(b)
Registration Statement or give irrevocable instructions for the payment
of such fee pursuant to Rule 111(b) under the Act.
6. The Company covenants and agrees with the several Underwriters that
the Company will pay or cause to be paid the following: (i) the fees,
disbursements and expenses of the Company's counsel and accountants in
connection with the registration of the Shares under the Act and all other
expenses in connection with the preparation, printing and filing of the
Registration Statement, any Preliminary Prospectus and the Prospectus and
amendments and supplements thereto and the mailing and delivering of copies
thereof to the Underwriters and dealers; (ii) the cost of printing or producing
any Agreement among Underwriters, this Agreement, the Blue Sky Memorandum,
closing documents (including any compilations thereof) and any other documents
in connection with the offering, purchase, sale and delivery of the Shares;
(iii) all expenses in connection with the qualification of the Shares for
offering and sale under state securities laws as provided in Section 5(b)
hereof, including the fees and disbursements of counsel for the Underwriters in
connection with such qualification and in connection with the Blue Sky survey;
(iv) all fees and expenses in connection with listing the Shares on the NASDAQ;
(v) the filing fees incident to, and the fees and disbursements of counsel for
the Underwriters in connection with, securing any required review by the
National Association of Securities Dealers, Inc. of the terms of the sale of the
Shares; (vi) the cost of preparing
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<PAGE> 9
stock certificates; (vii) the cost and charges of any transfer agent or
registrar; and (viii) all other costs and expenses incident to the performance
of its obligations hereunder which are not otherwise specifically provided for
in this Section. It is understood, however, that, except as provided in this
Section, and Sections 8 and 11 hereof, the Underwriters will pay all of their
own costs and expenses, including the fees of their counsel, stock transfer
taxes on resale of any of the Shares by them, and any advertising expenses
connected with any offers they may make.
7. The obligations of the Underwriters hereunder, as to the Shares to be
delivered at each Time of Delivery, shall be subject, in their discretion, to
the condition that all representations and warranties and other statements of
the Company herein are, at and as of such Time of Delivery, true and correct,
the condition that the Company shall have performed all of its obligations
hereunder theretofore to be performed, and the following additional conditions:
(a) The Prospectus shall have been filed with the Commission
pursuant to Rule 424(b) within the applicable time period prescribed for
such filing by the rules and regulations under the Act and in accordance
with Section 5(a) hereof; if the Company has elected to rely upon Rule
462(b), the Rule 462(b) Registration Statement shall have become
effective by 10:00 P.M., Washington, D.C. time, on the date of this
Agreement; no stop order suspending the effectiveness of the Registration
Statement or any part thereof shall have been issued and no proceeding
for that purpose shall have been initiated or threatened by the
Commission; and all requests for additional information on the part of
the Commission shall have been complied with to your reasonable
satisfaction;
(b) Latham & Watkins, counsel for the Underwriters, shall have
furnished to you such written opinion or opinions (a draft of each such
opinion is attached as Annex II(a) hereto), dated such Time of Delivery,
with respect to the matters covered in paragraphs (i), (ii), (vi), (x)
and (xii) of subsection (c) below as well as such other related matters
as you may reasonably request, and such counsel shall have received such
papers and information as they may reasonably request to enable them to
pass upon such matters;
(c) Piper Marbury Rudnick & Wolfe LLP, counsel for the Company,
shall have furnished to you their written opinion (a draft of such
opinion is attached as Annex II(b) hereto), dated such Time of Delivery,
in form and substance satisfactory to you, to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
State of Delaware, with power and authority (corporate and other)
to own its properties and conduct its business as described in the
Prospectus;
(ii) The Company has an authorized capitalization as set
forth in the Prospectus, and all of the issued shares of capital
stock of the Company have been duly and validly authorized and
issued and are fully paid and non-assessable; the Shares being
delivered at the Time of Delivery, when issued and delivered
against payment therefor as contemplated by this Agreement, will
be duly and validly authorized and issued, fully paid and
non-assessable; and the Shares conform in all material respects to
the description of the Stock contained in the Prospectus;
(iii) The Company has been duly qualified as a foreign
corporation for the transaction of business and is in good
standing under the laws of each other jurisdiction, as listed on a
schedule to the opinion, in which it owns or leases
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<PAGE> 10
properties or conducts any business so as to require such
qualification or is subject to no material liability or disability
by reason of failure to be so qualified in any such jurisdiction
(such counsel being entitled to rely in respect of the opinion in
this clause upon opinions of local counsel and in respect of
matters of fact upon certificates of officers of the Company,
provided that such counsel shall state that they believe that both
you and they are justified in relying upon such opinions and
certificates);
(iv) Each subsidiary of the Company has been duly
incorporated and is validly existing as a corporation in good
standing under the laws of its jurisdiction of incorporation; and
all of the issued shares of capital stock of each such subsidiary
have been duly and validly authorized and issued, are fully paid
and non-assessable, and (except for directors' qualifying shares
and except as otherwise set forth in the Prospectus) are owned
directly or indirectly by the Company, free and clear of all
liens, encumbrances, equities or claims (such counsel being
entitled to rely in respect of the opinion in this clause upon
opinions of local counsel and in respect to matters of fact upon
certificates of officers of the Company or its subsidiaries,
provided that such counsel shall state that they believe that both
you and they are justified in relying upon such opinions and
certificates);
(v) The Company and its subsidiaries, who do not own any
real property, have good and marketable title to all personal
property owned by them, free and clear of all liens, encumbrances
and defects except such as are described in the Prospectus or such
as do not materially affect the value of such property and do not
interfere with the use made and proposed to be made of such
property by the Company and its subsidiaries; and any material
real property and buildings held under lease by the Company and
its subsidiaries are held by them under valid, subsisting and
enforceable leases with such exceptions as are not material and do
not interfere with the use made and proposed to be made of such
property and buildings by the Company and its subsidiaries (in
giving the opinion in this clause, such counsel may state that
they are relying upon opinions of counsel to the lessors of such
property and, in respect to matters of fact, upon certificates of
officers of the Company or its subsidiaries, provided that such
counsel shall state that they believe that both you and they are
justified in relying upon such opinions, abstracts, reports,
policies and certificates);
(vi) This Agreement has been duly authorized, executed and
delivered by the Company;
(vii) The issue and sale of the Shares being delivered at
such Time of Delivery by the Company and the compliance by the
Company with all of the provisions of this Agreement and the
consummation of the transactions herein contemplated will not, to
such counsel's knowledge, conflict with or result in a breach or
violation of any of the terms or provisions of, or constitute a
default under, any indenture, mortgage, deed of trust, loan
agreement or other material agreement or material instrument known
to such counsel to which the Company or any of its subsidiaries is
a party or by which the Company or any of its subsidiaries is
bound, including any agreement or instrument identified to us by
an officer of the Company as material to the Company which
concerns telecommunications regulatory matters or the
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provision or receipt of telecommunications services by the Company
or any of its subsidiaries, or to which any of the property or
assets of the Company or any of its subsidiaries is subject, nor
will such action result in any violation of (i) the provisions of
the Certificate of Incorporation or By-laws of the Company or (ii)
any statute or any order, rule or regulation (other than any
order, rule or regulation of the FCC or any State Commission
applicable to the Company or any of its subsidiaries) of any court
or governmental agency or body having jurisdiction over the
Company or any of its subsidiaries or any of their properties
except, in the case of sub-paragraph (ii), where such violation
would not have a material adverse effect on the Company;
(viii) No consent, approval, authorization, order,
registration or qualification of or with any such court or
governmental agency or body (other than the FCC or any State
Commission) is required for the issue and sale of the Shares or
the consummation by the Company of the transactions contemplated
by this Agreement, except the registration under the Act of the
Shares, and such consents, approvals, authorizations,
registrations or qualifications as may be required under state
securities or Blue Sky laws in connection with the purchase and
distribution of the Shares by the Underwriters;
(ix) To such counsel's knowledge, neither the Company nor
any of its subsidiaries is in violation of its Certificate of
Incorporation or By-laws or in default in the performance or
observance of any material obligation, agreement, covenant or
condition contained in any indenture, mortgage, deed of trust,
loan agreement, material lease or other material agreement or
material instrument to which it is a party or by which it or any
of its properties may be bound, provided, however, that such
counsel does not express an opinion regarding any forementioned
obligation or agreement which concerns telecommunications
regulatory matters or the provision of telecommunications services
by the Company or any of its subsidiaries;
(x) The statements set forth in the Prospectus under the
caption "Description of Our Capital Stock", insofar as they
purport to constitute a summary of the terms of the Stock and
under the caption "Underwriting", insofar as they purport to
describe the provisions of the laws and documents referred to
therein, are accurate, complete and fair;
(xi) The Company is not an "investment company", as such
term is defined in the Investment Company Act; and
(xii) The Registration Statement and the Prospectus and any
further amendments and supplements thereto made by the Company
prior to such Time of Delivery (other than the financial
statements and related schedules therein, as to which such counsel
need express no opinion) comply as to form in all material
respects with the requirements of the Act and the rules and
regulations thereunder; although they do not assume any
responsibility for the accuracy, completeness or fairness of the
statements contained in the Registration Statement or the
Prospectus, except for those referred to in the opinion in
subsection (x) of this section 7(c), no information has come to
such counsel's attention which causes them to conclude that, as of
its effective date, the Registration Statement or any further
amendment thereto made by the Company prior to such Time of
Delivery (other than
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the financial statements and related schedules therein, as to
which such counsel need express no opinion) contained an untrue
statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements
therein not misleading or that, as of its date, the Prospectus or
any further amendment or supplement thereto made by the Company
prior to such Time of Delivery (other than the financial
statements and related schedules therein, as to which such counsel
need express no opinion) contained an untrue statement of a
material fact or omitted to state a material fact necessary to
make the statements therein, in the light of the circumstances
under which they were made, not misleading or that, as of such
Time of Delivery, either the Registration Statement or the
Prospectus or any further amendment or supplement thereto made by
the Company prior to such Time of Delivery (other than the
financial statements and related schedules therein, as to which
such counsel need express no opinion) contains an untrue statement
of a material fact or omits to state a material fact necessary to
make the statements therein, in the light of the circumstances
under which they were made, not misleading; and they do not know
of any amendment to the Registration Statement required to be
filed or of any contracts or other documents of a character
required to be filed as an exhibit to the Registration Statement
or required to be described in the Registration Statement or the
Prospectus which are not filed or described as required;
(d) Kelley Drye & Warren LLP, regulatory counsel for the Company,
shall have furnished to you their written opinion (a draft of such opinion is
attached as Annex II(c) hereto), dated such Time of Delivery, in form and
substance satisfactory to you, to the effect that:
(i) The issue and sale of the Shares being delivered at
such Time of Delivery by the Company and the compliance by the
Company with all of the provisions of this Agreement and the
consummation of the transactions herein contemplated will not, to
such counsel's knowledge, conflict with or result in a breach or
violation of any of the terms or provisions of, or constitute a
default under any order, rule or regulation of the FCC or any
State Commission applicable to the Company or any of its
subsidiaries except where such violation would not have a material
adverse effect on the Company, and no authorizations, authorities,
consents, approvals, licenses, permits declarations,
registrations, notifications or other filings with the FCC or any
State Commission are required under the Communications Act or
analogous state communications laws in connection with the
execution and delivery by the Company of, and the performance by
the Company of its obligations under this Agreement, except to the
extent that such authorizations, authorities, consents, approvals
or licenses have been obtained and remain in effect or such
notifications have been timely given or such registrations or
filings have been made in accordance with applicable law;
(ii) Except as disclosed in the Prospectus and on a
schedule to the opinion, the Company and its subsidiaries have all
of the licenses, certificates, permits, authorities and
authorizations (collectively, the "Permits"), if any, required by
the FCC and the Permits required by any State Commission for the
provision of telecommunications services except where the failure
to obtain or hold such Permit would not have a material adverse
effect on the Company; except as disclosed in the
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Prospectus and on a schedule to the opinion, (a) each of the
Permits issued by the FCC and State Commissions, all of which are
listed on such schedule, is in full force and effect, and has not
been suspended, revoked, cancelled or modified in any materially
adverse way, (b) each Permit is validly held by the Company or the
subsidiary whose name is set forth on such schedule opposite the
Permit, (c) each Permit has the expiration date shown on such
schedule and (d) each Permit authorizes, without further license,
certificate, permit, authority or other authorization of the FCC
or any State Commission, the operation of each of the services
identified on such schedule at the locations or geographic area
identified on such schedule;
(iii) Except as disclosed in the Prospectus and on a
schedule to the opinion, the Company and each subsidiary has
timely filed all applications for the renewal of any Permit set
forth opposite the Company's or the subsidiary's name on a
schedule to the opinion for which applications for renewal were
required to be filed on or before the date of this opinion except
where the failure to file such application for renewal of such
Permit would not have a material adverse effect on the Company;
(iv) To the best of such counsel's knowledge, except as
disclosed in the Prospectus and on a schedule to the opinion, (a)
no petition to deny, petition for revocation, complaint,
opposition or objection is pending before the FCC or any State
Commission against any of the Permits or the Company or any of its
subsidiaries (nor is any judicial review of any such action
pending), (b) there is no outstanding decree or order that has
been issued by the FCC or any State Commission against the Company
or any of its subsidiaries or with respect to any of the Permits,
and no pending or threatened litigation, proceeding, notice of
violation, notice of apparent liability, order to show cause,
complaint, inquiry or investigation before the FCC or any State
Commission against the Company or any of the subsidiaries which,
if decided adversely to the Company or any of the subsidiaries,
could reasonably be expected to result in the cancellation,
termination, revocation, forfeiture or material impairment of any
of the Permits, or have any material adverse effect upon, or cause
material disruption to, the Company or any of its subsidiaries, or
the ownership or operation of their respective businesses, except
for proceedings of general applicability to the telecommunications
industries, and (c) all requests, petitions, or other filings made
by or against the Company or any of the subsidiaries, the grant or
denial of which could have a material adverse effect on the
Company or the subsidiaries, are listed in a schedule to such
opinion;
(v) To the best of such counsel's knowledge, there are no
actions, suits or other proceedings by or before the FCC or any
State Commission pending or threatened against or involving the
Company or any of its subsidiaries, except as disclosed in the
Prospectus and on a schedule to the opinion;
(vi) The statements in the Prospectus under the heading of
"Risk Factors - Deregulation of the telecommunications industry
involves uncertainties, and the resolution of these uncertainties
could adversely affect our business", "Risk Factors - The conduct
of the ILECs, including Bell Atlantic, could adversely affect our
business" and "Government Regulation" fairly summarize the matters
therein described in an accurate and complete fashion;
13
<PAGE> 14
(e) On the date of the Prospectus at a time prior to the execution
of this Agreement, at 9:30 a.m., New York City time, on the effective
date of any post-effective amendment to the Registration Statement filed
subsequent to the date of this Agreement and also at each Time of
Delivery, Ernst & Young LLP shall have furnished to you a letter or
letters, dated the respective dates of delivery thereof, in form and
substance satisfactory to you, to the effect set forth in Annex I hereto
(the executed copy of the letter delivered prior to the execution of this
Agreement is attached as Annex I(a) hereto and a draft of the form of
letter to be delivered on the effective date of any post-effective
amendment to the Registration Statement and as of each Time of Delivery
is attached as Annex I(b) hereto);
(f) (i) Neither the Company nor any of its subsidiaries shall have
sustained since the date of the latest audited financial statements
included in the Prospectus any loss or interference with its business
from fire, explosion, flood or other calamity, whether or not covered by
insurance, or from any labor dispute or court or governmental action,
order or decree, otherwise than as set forth or contemplated in the
Prospectus, and (ii) since the respective dates as of which information
is given in the Prospectus there shall not have been any change in the
capital stock or long-term debt of the Company or any of its subsidiaries
or any change, or any development involving a prospective change, in or
affecting the general affairs, management, financial position,
stockholders' equity or results of operations of the Company and its
subsidiaries, otherwise than as set forth or contemplated in the
Prospectus, the effect of which, in any such case described in clause (i)
or (ii), is in the judgment of the Representatives so material and
adverse as to make it impracticable or inadvisable to proceed with the
public offering or the delivery of the Shares being delivered at such
Time of Delivery on the terms and in the manner contemplated in the
Prospectus;
(g) On or after the date hereof (i) no downgrading shall have
occurred in the rating accorded the Company's debt securities or
preferred stock by any "nationally recognized statistical rating
organization", as that term is defined by the Commission for purposes of
Rule 436(g)(2) under the Act, and (ii) no such organization shall have
publicly announced that it has under surveillance or review, with
possible negative implications, its rating of any of the Company's debt
securities or preferred stock;
(h) On or after the date hereof there shall not have occurred any
of the following: (i) a suspension or material limitation in trading in
securities generally on the New York Stock Exchange or on NASDAQ; (ii) a
suspension or material limitation in trading in the Company's securities
on NASDAQ; (iii) a general moratorium on commercial banking activities
declared by either Federal or New York State authorities; or (iv) the
outbreak or escalation of hostilities involving the United States or the
declaration by the United States of a national emergency or war, if the
effect of any such event specified in this clause (iv) in the judgment of
the Representatives makes it impracticable or inadvisable to proceed with
the public offering or the delivery of the Shares being delivered at such
Time of Delivery on the terms and in the manner contemplated in the
Prospectus;
(i) The Shares to be sold at such Time of Delivery shall have been
duly listed for quotation on NASDAQ;
(j) The Company has obtained and delivered to the Underwriters
executed copies of an agreement from [list appropriate stockholders of
the Company], substantially to the effect set forth in Subsection 5(e)
hereof in form and substance satisfactory to you;
14
<PAGE> 15
(k) The Company shall have complied with the provisions of Section
5(c) hereof with respect to the furnishing of prospectuses on the New
York Business Day next succeeding the date of this Agreement; and
(l) The Company shall have furnished or caused to be furnished to
you at such Time of Delivery certificates of officers of the Company
satisfactory to you as to the accuracy of the representations and
warranties of the Company herein at and as of such Time of Delivery, as
to the performance by the Company of all of its obligations hereunder to
be performed at or prior to such Time of Delivery, as to the matters set
forth in subsections (a) and (e) of this Section and as to such other
matters as you may reasonably request.
8. (a) The Company will indemnify and hold harmless each Underwriter
against any losses, claims, damages or liabilities, joint or several, to which
such Underwriter may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon an untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus, the Registration
Statement or the Prospectus, or any amendment or supplement thereto, or arise
out of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse each Underwriter for any legal or
other expenses reasonably incurred by such Underwriter in connection with
investigating or defending any such action or claim as such expenses are
incurred; provided, however, that the Company shall not be liable in any such
case to the extent that any such loss, claim, damage or liability arises out of
or is based upon an untrue statement or alleged untrue statement or omission or
alleged omission made in any Preliminary Prospectus, the Registration Statement
or the Prospectus or any such amendment or supplement in reliance upon and in
conformity with written information furnished to the Company by any Underwriter
through Goldman, Sachs & Co. expressly for use therein.
(b) Each Underwriter will indemnify and hold harmless the Company against
any losses, claims, damages or liabilities to which the Company may become
subject, under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon an
untrue statement or alleged untrue statement of a material fact contained in any
Preliminary Prospectus, the Registration Statement or the Prospectus, or any
amendment or supplement thereto, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, in each case
to the extent, but only to the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission was made in any Preliminary
Prospectus, the Registration Statement or the Prospectus or any such amendment
or supplement in reliance upon and in conformity with written information
furnished to the Company by such Underwriter through Goldman, Sachs & Co.
expressly for use therein; and will reimburse the Company for any legal or other
expenses reasonably incurred by the Company in connection with investigating or
defending any such action or claim as such expenses are incurred.
(c) Promptly after receipt by an indemnified party under subsection (a)
or (b) above of notice of the commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made against the indemnifying
party under such subsection, notify the indemnifying party in writing of the
commencement thereof; but the omission so to notify the indemnifying party shall
not relieve it from any liability which it may have to any indemnified party
otherwise than under such subsection. In case any such action shall be brought
against any indemnified party and it shall notify
15
<PAGE> 16
the indemnifying party of the commencement thereof, the indemnifying party shall
be entitled to participate therein and, to the extent that it shall wish,
jointly with any other indemnifying party similarly notified, to assume the
defense thereof, with counsel satisfactory to such indemnified party (who shall
not, except with the consent of the indemnified party, be counsel to the
indemnifying party), and, after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party shall not be liable to such indemnified party under such
subsection for any legal expenses of other counsel or any other expenses, in
each case subsequently incurred by such indemnified party, in connection with
the defense thereof other than reasonable costs of investigation. No
indemnifying party shall, without the written consent of the indemnified party,
effect the settlement or compromise of, or consent to the entry of any judgment
with respect to, any pending or threatened action or claim in respect of which
indemnification or contribution may be sought hereunder (whether or not the
indemnified party is an actual or potential party to such action or claim)
unless such settlement, compromise or judgment (i) includes an unconditional
release of the indemnified party from all liability arising out of such action
or claim and (ii) does not include a statement as to or an admission of fault,
culpability or a failure to act, by or on behalf of any indemnified party.
(d) If the indemnification provided for in this Section 8 is unavailable
to or insufficient to hold harmless an indemnified party under subsection (a) or
(b) above in respect of any losses, claims, damages or liabilities (or actions
in respect thereof) referred to therein, then each indemnifying party shall
contribute to the amount paid or payable by such indemnified party as a result
of such losses, claims, damages or liabilities (or actions in respect thereof)
in such proportion as is appropriate to reflect the relative benefits received
by the Company on the one hand and the Underwriters on the other from the
offering of the Shares. If, however, the allocation provided by the immediately
preceding sentence is not permitted by applicable law or if the indemnified
party failed to give the notice required under subsection (c) above, then each
indemnifying party shall contribute to such amount paid or payable by such
indemnified party in such proportion as is appropriate to reflect not only such
relative benefits but also the relative fault of the Company on the one hand and
the Underwriters on the other in connection with the statements or omissions
which resulted in such losses, claims, damages or liabilities (or actions in
respect thereof), as well as any other relevant equitable considerations. The
relative benefits received by the Company on the one hand and the Underwriters
on the other shall be deemed to be in the same proportion as the total net
proceeds from the offering (before deducting expenses) received by the Company
bear to the total underwriting discounts and commissions received by the
Underwriters, in each case as set forth in the table on the cover page of the
Prospectus. The relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company on the one hand or the Underwriters on the other and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Company and the Underwriters
agree that it would not be just and equitable if contributions pursuant to this
subsection (d) were determined by pro rata allocation (even if the Underwriters
were treated as one entity for such purpose) or by any other method of
allocation which does not take account of the equitable considerations referred
to above in this subsection (d). The amount paid or payable by an indemnified
party as a result of the losses, claims, damages or liabilities (or actions in
respect thereof) referred to above in this subsection (d) shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this subsection (d), no Underwriter shall be
16
<PAGE> 17
required to contribute any amount in excess of the amount by which the total
price at which the Shares underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages which such Underwriter
has otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this subsection (d) to
contribute are several in proportion to their respective underwriting
obligations and not joint.
(e) The obligations of the Company under this Section 8 shall be in
addition to any liability which the Company may otherwise have and shall extend,
upon the same terms and conditions, to each person, if any, who controls any
Underwriter within the meaning of the Act; and the obligations of the
Underwriters under this Section 8 shall be in addition to any liability which
the respective Underwriters may otherwise have and shall extend, upon the same
terms and conditions, to each officer and director of the Company and to each
person, if any, who controls the Company within the meaning of the Act.
9. (a) If any Underwriter shall default in its obligation to purchase the
Shares which it has agreed to purchase hereunder at a Time of Delivery, you may
in your discretion arrange for you or another party or other parties to purchase
such Shares on the terms contained herein. If within thirty-six hours after such
default by any Underwriter you do not arrange for the purchase of such Shares,
then the Company shall be entitled to a further period of thirty-six hours
within which to procure another party or other parties satisfactory to you to
purchase such Shares on such terms. In the event that, within the respective
prescribed periods, you notify the Company that you have so arranged for the
purchase of such Shares, or the Company notifies you that it has so arranged for
the purchase of such Shares, you or the Company shall have the right to postpone
such Time of Delivery for a period of not more than seven days, in order to
effect whatever changes may thereby be made necessary in the Registration
Statement or the Prospectus, or in any other documents or arrangements, and the
Company agrees to file promptly any amendments to the Registration Statement or
the Prospectus which in your opinion may thereby be made necessary. The term
"Underwriter" as used in this Agreement shall include any person substituted
under this Section with like effect as if such person had originally been a
party to this Agreement with respect to such Shares.
(b) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company as
provided in subsection (a) above, the aggregate number of such Shares which
remains unpurchased does not exceed one-eleventh of the aggregate number of all
the Shares to be purchased at such Time of Delivery, then the Company shall have
the right to require each non-defaulting Underwriter to purchase the number of
shares which such Underwriter agreed to purchase hereunder at such Time of
Delivery and, in addition, to require each non-defaulting Underwriter to
purchase its pro rata share (based on the number of Shares which such
Underwriter agreed to purchase hereunder) of the Shares of such defaulting
Underwriter or Underwriters for which such arrangements have not been made; but
nothing herein shall relieve a defaulting Underwriter from liability for its
default.
(c) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters by you and the Company as
provided in subsection (a) above, the aggregate number of such Shares which
remains unpurchased exceeds one-eleventh of the
17
<PAGE> 18
aggregate number of all the Shares to be purchased at such Time of Delivery, or
if the Company shall not exercise the right described in subsection (b) above to
require non-defaulting Underwriters to purchase Shares of a defaulting
Underwriter or Underwriters, then this Agreement (or, with respect to the Second
Time of Delivery, the obligations of the Underwriters to purchase and of the
Company to sell the Optional Shares) shall thereupon terminate, without
liability on the part of any non-defaulting Underwriter or the Company, except
for the expenses to be borne by the Company and the Underwriters as provided in
Section 6 hereof and the indemnity and contribution agreements in Section 8
hereof; but nothing herein shall relieve a defaulting Underwriter from liability
for its default.
10. The respective indemnities, agreements, representations, warranties
and other statements of the Company and the several Underwriters, as set forth
in this Agreement or made by or on behalf of them, respectively, pursuant to
this Agreement, shall remain in full force and effect, regardless of any
investigation (or any statement as to the results thereof) made by or on behalf
of any Underwriter or any controlling person of any Underwriter, or the Company,
or any officer or director or controlling person of the Company, and shall
survive delivery of and payment for the Shares.
11. If this Agreement shall be terminated pursuant to Section 9 hereof,
the Company shall not then be under any liability to any Underwriter except as
provided in Sections 6 and 8 hereof; but, if for any other reason, any Shares
are not delivered by or on behalf of the Company as provided herein, the Company
will reimburse the Underwriters through you for all out-of-pocket expenses
approved in writing by you, including fees and disbursements of counsel,
reasonably incurred by the Underwriters in making preparations for the purchase,
sale and delivery of the Shares not so delivered, but the Company shall then be
under no further liability to any Underwriter except as provided in Sections 6
and 8 hereof.
12. In all dealings hereunder, you shall act on behalf of each of the
Underwriters, and the parties hereto shall be entitled to act and rely upon any
statement, request, notice or agreement on behalf of any Underwriter made or
given by you jointly or by Goldman, Sachs & Co. on behalf of you as the
representatives.
All statements, requests, notices and agreements hereunder shall be in
writing, and if to the Underwriters shall be delivered or sent by mail, telex or
facsimile transmission to you as the representatives in care of Goldman, Sachs &
Co., 32 Old Slip, 21st Floor, New York, New York 10005, Attention: Registration
Department; and if to the Company shall be delivered or sent by mail to the
address of the Company set forth in the Registration Statement, Attention:
Secretary; provided, however, that any notice to an Underwriter pursuant to
Section 8(c) hereof shall be delivered or sent by mail, telex or facsimile
transmission to such Underwriter at its address set forth in its Underwriters'
Questionnaire, or telex constituting such Questionnaire, which address will be
supplied to the Company by you upon request. Any such statements, requests,
notices or agreements shall take effect upon receipt thereof.
13. This Agreement shall be binding upon, and inure solely to the benefit
of, the Underwriters, the Company and, to the extent provided in Sections 8 and
10 hereof, the officers and directors of the Company and each person who
controls the Company or any Underwriter, and their respective heirs, executors,
administrators, successors and assigns, and no other person shall acquire or
have any right under or by virtue of this Agreement. No purchaser of any of the
Shares from any Underwriter shall be deemed a successor or assign by reason
merely of such purchase.
14. Time shall be of the essence of this Agreement. As used herein, the
term "business
18
<PAGE> 19
day" shall mean any day when the Commission's office in Washington, D.C. is open
for business.
15. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW YORK.
16. This Agreement may be executed by any one or more of the parties
hereto in any number of counterparts, each of which shall be deemed to be an
original, but all such counterparts shall together constitute one and the same
instrument.
If the foregoing is in accordance with your understanding, please sign
and return to us one for the Company and each of the Representatives plus one
for each counsel counterparts hereof, and upon the acceptance hereof by you, on
behalf of each of the Underwriters, this letter and such acceptance hereof shall
constitute a binding agreement between each of the Underwriters and the Company.
It is understood that your acceptance of this letter on behalf of each of the
Underwriters is pursuant to the authority set forth in a form of Agreement among
Underwriters, the form of which shall be submitted to the Company for
examination upon request, but without warranty on your part as to the authority
of the signers thereof.
<TABLE>
<S> <C>
Very truly yours,
Net2000 Communications, Inc.
By:
Name:
Title:
Accepted as of the date hereof:
Goldman, Sachs & Co.
Donaldson, Lufkin & Jenrette Securities Corporation
J.P. Morgan Securities Inc.
Legg Mason Wood Walker, Incorporated
By:
(Goldman, Sachs & Co.)
On behalf of each of the Underwriters
</TABLE>
SCHEDULE I
<TABLE>
<CAPTION>
NUMBER OF OPTIONAL
SHARES TO BE
TOTAL NUMBER OF PURCHASED IF
FIRM SHARES MAXIMUM OPTION
UNDERWRITER TO BE PURCHASED EXERCISED
----------- ---------------
<S> <C> <C>
Goldman, Sachs & Co
Donaldson, Lufkin & Jenrette Securities Corporation
J.P. Morgan Securities Inc
Legg Mason Wood Walker, Incorporated
Total
</TABLE>
19
<PAGE> 20
ANNEX I(a)
[copy of executed comfort letter]
20
<PAGE> 21
ANNEX I(b)
Pursuant to Section 7(d) of the Underwriting Agreement, the accountants
shall furnish letters to the Underwriters to the effect that:
(i) They are independent certified public accountants with respect
to the Company and its subsidiaries within the meaning of the Act and the
applicable published rules and regulations thereunder;
(ii) In their opinion, the financial statements and any
supplementary financial information and schedules (and, if applicable,
financial forecasts and/or pro forma financial information) examined by
them and included in the Prospectus or the Registration Statement comply
as to form in all material respects with the applicable accounting
requirements of the Act and the related published rules and regulations
thereunder; and, if applicable, they have made a review in accordance
with standards established by the American Institute of Certified Public
Accountants of the unaudited consolidated interim financial statements,
selected financial data, pro forma financial information, financial
forecasts and/or condensed financial statements derived from audited
financial statements of the Company for the periods specified in such
letter, as indicated in their reports thereon, copies of which have been
[SEPARATELY] furnished to the representatives of the Underwriters (the
"Representatives")[AND ARE ATTACHED HERETO];
(iii) They have made a review in accordance with standards
established by the American Institute of Certified Public Accountants of
the unaudited condensed consolidated statements of income, consolidated
balance sheets and consolidated statements of cash flows included in the
Prospectus as indicated in their reports thereon copies of which [HAVE
BEEN SEPARATELY FURNISHED TO THE REPRESENTATIVES] [AND ARE ATTACHED
HERETO] and on the basis of specified procedures including inquiries of
officials of the Company who have responsibility for financial and
accounting matters regarding whether the unaudited condensed consolidated
financial statements referred to in paragraph (vi)(A)(i) below comply as
to form in all material respects with the applicable accounting
requirements of the Act and the related published rules and regulations,
nothing came to their attention that cause them to believe that the
unaudited condensed consolidated financial statements do not comply as to
form in all material respects with the applicable accounting requirements
of the Act and the related published rules and regulations;
(iv) The unaudited selected financial information with respect to
the consolidated results of operations and financial position of the
Company for the five most recent fiscal years included in the Prospectus
agrees with the corresponding amounts (after restatements where
applicable) in the audited consolidated financial statements for such
five fiscal years which were included or incorporated by reference in the
Company's Annual Reports on Form 10-K for such fiscal years;
(v) They have compared the information in the Prospectus under
selected captions with the disclosure requirements of Regulation S-K and
on the basis of limited procedures specified in such letter nothing came
to their attention as a result of the foregoing procedures that caused
them to believe that this information does not conform in all material
respects with the disclosure requirements of Items 301, 302, 402 and
503(d), respectively, of Regulation S-K;
<PAGE> 22
(vi) On the basis of limited procedures, not constituting an
examination in accordance with generally accepted auditing standards,
consisting of a reading of the unaudited financial statements and other
information referred to below, a reading of the latest available interim
financial statements of the Company and its subsidiaries, inspection of
the minute books of the Company and its subsidiaries since the date of
the latest audited financial statements included in the Prospectus,
inquiries of officials of the Company and its subsidiaries responsible
for financial and accounting matters and such other inquiries and
procedures as may be specified in such letter, nothing came to their
attention that caused them to believe that:
(A) (i) the unaudited consolidated statements of income,
consolidated balance sheets and consolidated statements of cash
flows included in the Prospectus do not comply as to form in all
material respects with the applicable accounting requirements of
the Act and the related published rules and regulations, or (ii)
any material modifications should be made to the unaudited
condensed consolidated statements of income, consolidated balance
sheets and consolidated statements of cash flows included in the
Prospectus for them to be in conformity with generally accepted
accounting principles;
(B) any other unaudited income statement data and balance
sheet items included in the Prospectus do not agree with the
corresponding items in the unaudited consolidated financial
statements from which such data and items were derived, and any
such unaudited data and items were not determined on a basis
substantially consistent with the basis for the corresponding
amounts in the audited consolidated financial statements included
in the Prospectus;
(C) the unaudited financial statements which were not
included in the Prospectus but from which were derived any
unaudited condensed financial statements referred to in clause (A)
and any unaudited income statement data and balance sheet items
included in the Prospectus and referred to in clause (B) were not
determined on a basis substantially consistent with the basis for
the audited consolidated financial statements included in the
Prospectus;
(D) any unaudited pro forma consolidated condensed
financial statements included in the Prospectus do not comply as
to form in all material respects with the applicable accounting
requirements of the Act and the published rules and regulations
thereunder or the pro forma adjustments have not been properly
applied to the historical amounts in the compilation of those
statements;
(E) as of a specified date not more than five days prior to
the date of such letter, there have been any changes in the
consolidated capital stock (other than issuances of capital stock
upon exercise of options and stock appreciation rights, upon
earn-outs of performance shares and upon conversions of
convertible securities, in each case which were outstanding on the
date of the latest financial statements included in the
Prospectus) or any increase in the consolidated long-term debt of
the Company and its subsidiaries, or any decreases in consolidated
net current assets or stockholders' equity or other items
specified by the Representatives, or any increases in any items
specified by the Representatives, in each case as compared with
amounts shown in the latest balance sheet included in
<PAGE> 23
the Prospectus, except in each case for changes, increases or
decreases which the Prospectus discloses have occurred or may
occur or which are described in such letter; and
(F) for the period from the date of the latest financial
statements included in the Prospectus to the specified date
referred to in clause (E) there were any decreases in consolidated
net revenues or operating profit or the total or per share amounts
of consolidated net income or other items specified by the
Representatives, or any increases in any items specified by the
Representatives, in each case as compared with the comparable
period of the preceding year and with any other period of
corresponding length specified by the Representatives, except in
each case for decreases or increases which the Prospectus
discloses have occurred or may occur or which are described in
such letter; and
(vii) In addition to the examination referred to in their report(s)
included in the Prospectus and the limited procedures, inspection of minute
books, inquiries and other procedures referred to in paragraphs (iii) and (vi)
above, they have carried out certain specified procedures, not constituting an
examination in accordance with generally accepted auditing standards, with
respect to certain amounts, percentages and financial information specified by
the Representatives, which are derived from the general accounting records of
the Company and its subsidiaries, which appear in the Prospectus, or in Part II
of, or in exhibits and schedules to, the Registration Statement specified by the
Representatives, and have compared certain of such amounts, percentages and
financial information with the accounting records of the Company and its
subsidiaries and have found them to be in agreement.
<PAGE> 24
ANNEX II(a)
[II(a): DRAFT L&W OPINION]
<PAGE> 25
ANNEX II(b)
[ II(b): DRAFT PIPER & MARBURY OPINION]
<PAGE> 26
ANNEX II(c)
[ II(c): DRAFT KELLEY DRYE OPINION]
<PAGE> 1
EXHIBIT 3.1.2
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
NET2000 COMMUNICATIONS, INC.
Pursuant to Sections 242 and 245
Of the Corporation Law of the
State of Delaware
NET2000 COMMUNICATIONS, INC., a corporation organized and existing
under the laws of the State of Delaware (the "Corporation"), hereby certifies as
follows:
The name of the Corporation is Net2000 Communications, Inc. The date
of filing of its original Certificate of Incorporation with the Secretary of
State was October 8, 1998. At a meeting of the Board of Directors of the
Corporation a resolution was duly adopted, pursuant to Sections 242 and 245 of
the General Corporation Law of the State of Delaware, setting forth an amended
and restated Certificate of Incorporation of the Corporation and declaring said
amendment and restatement to be advisable. The stockholders of the Corporation
duly approved said proposed amendment and restatement in accordance with
Sections 242 and 245 by written consent in lieu of a meeting pursuant to and in
accordance with Section 228 the General Corporation Law of the State of
Delaware. The resolution setting forth the amendment is as follows:
RESOLVED: That the Certificate of Incorporation of the Corporation
be and hereby is amended and restated as follows:
FIRST. Name. The name of the Corporation is: Net2000 Communications,
Inc.
SECOND. Registered Office and Agent. The address of the
Corporation's registered office in the State of Delaware is The Corporation
Trust Center, 1209 Orange Street, in the City of Wilmington, County of New
Castle. The name of the Corporation's registered agent at such address is The
Corporation Trust Company.
THIRD. Purpose. The nature of the business or purposes to be
conducted or promoted by the Corporation is as follows:
To engage in any lawful act or activity for which corporations may
be organized under the General Corporation Law of Delaware and to possess and
exercise all of the powers and privileges granted by such law and any other law
of Delaware.
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FOURTH. Authorized Capital. The total number of shares of all
classes of stock which the Corporation shall have authority to issue is
260,000,000 shares, of which (i) 200,000,000 shall be shares of common stock,
par value $0.01 per share (the "Common Stock"), and (ii) 60,000,000 shall be
shares of undesignated capital stock, par value $0.01 per share (the
"Undesignated CapitalStock").
A. Common Stock
(1) General. The voting, dividend and liquidation rights of
the holders of the Common Stock are subject to and qualified by the rights of
the holders of the Undesignated Capital Stock Stock of any series as may be
designated by the Board of Directors upon any issuance of the Undesignated
Capital Stock Stock of any series.
(2) Voting. The holders of the Common Stock are entitled to
one vote for each share held at all meetings of stockholders. There shall be no
cumulative voting.
(3) Dividends. Dividends may be declared and paid on the
Common Stock from funds lawfully available therefor as and when determined by
the Board of Directors and subject to any preferential dividend rights of any
then outstanding Undesignated Capital Stock Stock.
(4) Liquidation. Upon the dissolution or liquidation of the
Corporation, whether voluntary or involuntary, holders of Common Stock will be
entitled to receive all assets of the Corporation available for distribution to
its stockholders, subject to any preferential rights of any then outstanding
Undesignated Capital Stock Stock.
(5) Redemption. The Common Stock is not redeemable.
B. Undesignated Capital Stock. The Board of Directors
expressly is authorized, subject to limitations prescribed by the Delaware
General Corporation Law and the provisions of this Amended and Restated
Certificate of Incorporation of the Corporation, to provide, by resolution and
by filing a certificate pursuant to the Delaware General Corporation Law, for
the issuance from time to time of the shares of Undesignated Capital Stock in
one or more series, to establish from time to time the number of shares to be
included in each such series, and to fix the designation, powers, preferences
and other rights of the shares of each such series and to fix the
qualifications, limitations and restrictions thereon, including, but without
limiting the generality of the foregoing, the following:
(1) the number of shares constituting that series and the
distinctive designation of that series;
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(2) the dividend rate on the shares of that series, whether
dividends shall be cumulative, and, if so, from which date or dates, and the
relative rights of priority, if any, of payment of dividends on shares of that
series;
(3) whether that series shall have voting rights, in
addition to the voting rights provided by law, and, if so, the terms of such
voting rights;
(4) whether that series shall have conversion privileges,
and, if so, the terms and conditions of such conversion, including provision for
adjustment of the conversion rate in such events as the Board of Directors shall
determine;
(5) whether or not the shares of that series shall be
redeemable, and, if so, the terms and conditions of such redemption, including
the dates upon or after which they shall be redeemable, and the amount per share
payable in case of redemption, which amount may vary under different conditions
and at different redemption rates;
(6) whether that series shall have a sinking fund for the
redemption or purchase of shares of that series, and, if so, the terms and
amount of such sinking fund;
(7) the rights of the shares of that series in the event of
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, and the relative rights of priority, if any, of payment of shares
of that series; and
(8) any other relative powers, preferences, and rights of
that series, and qualifications, limitations or restrictions on that series.
FIFTH. Board of Directors. In furtherance of and not in limitation
of powers conferred by statute, it is further provided:
A. Election of directors need not be by written ballot
unless the By-Laws of the Corporation shall so provide. Except as otherwise
provided in this Amended and Restated Certificate of Incorporation or a
certificate of designation relating to the rights of the holders of any class or
series of Undesignated Capital Stock Stock, voting separately by class or
series, to elect additional directors under specified circumstances, the number
of directors of the Corporation shall be as fixed from time to time by or
pursuant to the By-Laws of the Corporation. No director of the Corporation need
be a stockholder of the Corporation.
B. The Board of Directors shall be classified with respect
to the time for which they severally hold office into three separate classes,
Class I, Class II and Class III, which shall be as nearly equal in number as
possible, and shall be adjusted from time to time in the manner specified in the
By-Laws of the Corporation to maintain such proportionality. Each initial
director in Class I shall hold office for a term expiring at the 2000 annual
meeting of stockholders. Each initial director in Class II shall hold office
initially for a term expiring at the
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2001 annual meeting of stockholders. Each initial director in Class III shall
hold office for a term expiring at the 2002 annual meeting of stockholders.
Notwithstanding the foregoing provisions of this Article FIFTH, each director
shall serve until such director's successor is duly elected and qualified or
until such director's earlier death, resignation or removal. At each annual
meeting of stockholders, the successors to the class of directors whose term
expires at that meeting shall be elected to hold office for a term expiring at
the annual meeting of stockholders held in the third year following the year of
their election and until their successors have been duly elected and qualified
or until any such director's earlier death, resignation or removal.
C. The Board of Directors is expressly authorized to adopt,
amend or repeal the By-Laws of the Corporation.
SIXTH. Meetings of Stockholders. Meetings of stockholders may be
held within or without the State of Delaware, as the By-Laws of the Corporation
may provide. Upon the closing of an underwritten initial public offering of the
Corporation's Common Stock pursuant to the effective registration statement
under the Securities Act of 1933, as amended, any action required or permitted
to be taken at any annual or special meeting of stockholders of the Corporation
may be taken only upon the vote of stockholders at an annual or special meeting
duly noticed and called in accordance with the General Corporation Law of the
State of Delaware and may not be taken by written consent of stockholders
without a meeting, unless such consent is unanimous.
SEVENTH: Special Meetings of Stockholders. Special meeting of
stockholders may be called at any time by the Chairman of the Board, Chief
Executive Officer, the President, or the majority of the Board of Directors.
Business transacted at any special meeting of stockholders shall be limited to
matters relating to the purpose or purposes stated in the notice of meeting.
EIGHTH. Limitation on Liability. No director of the Corporation
shall be personally liable to the Corporation or to any stockholder of the
Corporation for monetary damages for breach of fiduciary duty as a director,
provided that this provision shall not limit the liability of a director (i) for
any breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involved
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the General Corporation Law of Delaware, or (iv) for any transaction from which
the director derived an improper personal benefit.
If the General Corporation Law of Delaware or any other statute of
the State of Delaware hereafter is amended to authorize the further elimination
or limitation of the liability of directors of the corporation, then the
liability of a director of the corporation shall be limited to the fullest
extent permitted by the statutes of the State of Delaware, as so amended, and
such elimination or limitation of liability shall be in addition to, and not in
lieu of, the limitation on the liability of a director provided by the foregoing
provisions of this Article EIGHTH.
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Any repeal of or amendment to this Article EIGHTH shall be
prospective only and shall not adversely affect any limitation on the liability
of a director of the corporation existing at the time of such repeal or
amendment.
NINTH. To the extent permitted by law, the Corporation shall fully
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding (whether
civil, criminal, administrative or investigative) by reason of the fact that
such person is or was a director or officer of the Corporation, or is or was
serving at the request of the Corporation as a director or officer of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding.
To the extent permitted by law, the Corporation may fully indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding (whether civil,
criminal, administrative or investigative) by reason of the fact that such
person is or was an employee or agent of the Corporation, or is or was serving
at the request of the Corporation as an employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding.
The Corporation may advance expenses (including attorneys' fees)
incurred by a director or officer in advance of the final disposition of such
action, suit or proceeding upon the receipt of an undertaking by or on behalf of
the director or officer to repay such amount if it shall ultimately be
determined that such director or officer is not entitled to indemnification. The
Corporation may advance expenses (including attorneys' fees) incurred by an
employee or agent in advance of the final disposition of such action, suit or
proceeding upon such terms and conditions, if any, as the Board of Directors and
its delegates deem appropriate.
No stockholder shall bring any action or lawsuit against the
Corporation, any of its subsidiaries or its affiliates, or any officer or
director thereof (in their respective capacities), unless such stockholder and
any person controlling such stockholder shall have entered into a written
agreement with the Corporation, reasonably satisfactory to it, requiring the
losing party, and any person controlling the stockholder, if the stockholder
shall be the losing party, to pay to the prevailing party the attorneys' fees
and expenses incurred by the prevailing party in such action. As used in this
provision, the term "person" shall have the same meaning given it in Section
13(d) of the Securities Exchange Act of 1934 ("Exchange Act"), and the terms
"affiliate" and "controlling" shall have the same meanings given them in Rule
12b-2 under the Exchange Act.
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TENTH. The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Amended and Restated Certificate of
Incorporation, in the manner now or hereafter prescribed by statute and the
Certificate of Incorporation, and all rights conferred upon stockholders herein
are granted subject to this reservation. Notwithstanding the foregoing, the
affirmative vote of the holders of at least 66-2/3% of the outstanding capital
stock entitled to vote thereon shall be required to alter, amend or repeal
Articles FIFTH, SEVENTH and NINTH or this Amended and Restated Certificate of
Incorporation.
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IN WITNESS WHEREOF, Net2000 Communications, Inc. has caused this
Amended and Restated Certificate of Incorporation to be signed by Clayton A.
Thomas, Jr., its Chief Executive Officer this __ day of ____________, 1999.
NET2000 COMMUNICATIONS, INC.
By:
----------------------------------
Clayton A. Thomas, Jr.
Chief Executive Officer
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EXHIBIT 3.1.4
AMENDED AND RESTATED
BY-LAWS
OF
NET2000 COMMUNICATIONS, INC.
ARTICLE 1 - Stockholders
1.1 Place of Meeting. All meetings of stockholders shall be held at
such place within or without the State of Delaware as may be designated from
time to time by the Board of Directors, Chief Executive Officer, the President
or, if not so designated, at the registered office of the Company.
1.2 Annual Meeting. The annual meeting of stockholders for the
election of directors and for the transaction of such other business as may
properly be brought before the meeting shall be held at such date, time and
place as may be fixed by the Board of Directors, Chief Executive Officer or the
President. If this date shall fall upon a legal holiday at the place of the
meeting, then such meeting shall be held on the next succeeding business day at
the same hour. If no annual meeting is held in accordance with the foregoing
provisions, the Board of Directors shall cause the meeting to be held as soon
thereafter as convenient. If no annual meeting is held in accordance with the
foregoing provisions, a special meeting may be held in lieu of the annual
meeting, and any action taken at that special meeting shall have the same effect
as if it had been taken at the annual meeting, and in such case all references
in these By-Laws to the annual meeting of the stockholders shall be deemed to
refer to such special meeting.
1.3 Special Meetings. Special meeting of stockholders may be called at
any time by the Chairman of the Board, the Chief Executive Officer, the
President, or the majority of the Board of Directors. Business transacted at any
special meeting of stockholders shall be limited to matters relating to the
purpose or purposes stated in the notice of meeting.
1.4 Notice of Meetings. Except as otherwise provided by law, written
notice of each meeting of stockholders, whether annual or special, shall be
given not less than ten nor more than 60 days before the date of the meeting to
each stockholder entitled to vote at such meeting. The notices of all meetings
shall state the place, date and hour of the meeting. The notice of a special
meeting shall state, in addition, the purpose or purposes for which the meeting
is called. If mailed, notice is given when deposited in the United States mail,
postage prepaid, directed to the stockholder at the stockholder's address as it
appears on the records of the Company.
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1.5 Voting List. The officer who has charge of the stock ledger of the
Company shall prepare, at least 10 days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least 10 days prior to the
meeting, at a place within the city where the meeting is to be held. The list
shall also be produced and kept at the time and place of the meeting during the
whole time of the meeting, and may be inspected by any stockholder who is
present.
1.6 Quorum. Except as otherwise provided by law, the Certificate of
Incorporation or these By-Laws, the holders of a majority of the shares of the
capital stock of the Company issued and outstanding and entitled to vote at the
meeting, present in person or represented by proxy, shall constitute a quorum
for the transaction of business.
1.7 Adjournments. Any meeting of stockholders may be adjourned to any
other time and to any other place at which a meeting of stockholders may be held
under these By-Laws by the stockholders present or represented at the meeting
and entitled to vote, although less than a quorum, or, if no stockholder is
present, by any officer entitled to preside at or to act as Secretary of such
meeting. It shall not be necessary to notify any stockholder of any adjournment
of less than 30 days if the time and place of the adjourned meeting are
announced at the meeting at which adjournment is taken, unless after the
adjournment a new record date is fixed for the adjourned meeting. At the
adjourned meeting, the Company may transact any business which might have been
transacted at the original meeting.
1.8 Voting and Proxies. Each stockholder shall have one vote for each
share of stock entitled to vote held of record by such stockholder and a
proportionate vote for each fractional share so held, unless otherwise provided
in the Certificate of Incorporation. Each stockholder of record entitled to vote
at a meeting of stockholders, or to express consent or dissent to corporate
action in writing without a meeting, may vote or express such consent or dissent
in person or may authorize another person or persons to vote or act for him or
her by written proxy executed by the stockholder or his or her authorized agent
and delivered to the Secretary of the Company. No such proxy shall be voted or
acted upon after three years from the date of its execution, unless the proxy
expressly provides for a longer period.
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1.9 Action at Meeting. When a quorum is present at any meeting, the
holders of a majority of the stock present or represented and voting on a matter
(or if there are two or more classes of stock entitled to vote as separate
classes, then in the case of each such class, the holders of a majority of the
stock of that class present or represented and voting on a matter) shall decide
any matter to be voted upon by the stockholders at such meeting, except when a
different vote is required by express provision of law, the Certificate of
Incorporation or these By-Laws. Any election by stockholders shall be determined
by a plurality of the votes cast by the stockholders entitled to vote at the
election.
1.10 Action without Meeting. Upon the closing of an underwritten
initial public offering of the Company's Common Stock pursuant to the effective
registration statement under the Securities Act of 1933, as amended, any action
required or permitted to be taken at any annual or special meeting of
stockholders of the Company may be taken only upon the vote of stockholders at
an annual or special meeting duly noticed and called in accordance with the
General Company Law of the State of Delaware and may not be taken by written
consent of stockholders without a meeting, unless such consent is unanimous.
1.11 Stockholder Nominations and Proposals. (a) No proposal for a
stockholder vote (a "Stockholder Proposal") shall be submitted to the
stockholders of the Company unless the stockholder submitting such proposal (the
"Proponent") shall have filed a written notice setting forth with particularity
(i) the names and business addresses of the Proponent and all Persons (as such
term is defined in Section 3(a)(9) of the Securities Exchange Act of 1934, as
amended, (the "Exchange Act")) acting in concert with the Proponent; (ii) the
names and addresses of the Proponent and the Persons identified in clause (i),
as they appear on the Company's books (if they so appear); (iii) the class and
number of shares of the Company beneficially owned by the Proponent and the
Persons identified in clause (i); (iv) a description of the Stockholder Proposal
containing all information material thereto; (v) a description of all
arrangements or understandings between the Proponent and any other Persons
(including the names of such other Persons) in connection with the Stockholder
Proposal and any material interest of the Proponent or such Persons in such
Stockholder Proposal and (vi) such other information as the Board of Directors
reasonably determines is necessary or appropriate to enable the Board of
Directors and stockholders to consider the Stockholder Proposal. Upon receipt of
the Stockholder Proposal and prior to the stockholders' meeting at which such
Stockholder Proposal will be considered, if the Board of Directors or a
designated committee or the officer who will preside at the meeting of the
stockholders determines that the information provided in a Stockholder Proposal
does not satisfy the requirements of this Section 1.11 or is otherwise not in
accordance with applicable law, the Secretary of the Company shall promptly
notify the Proponent of the deficiency in the notice. Such Proponent shall have
the opportunity to cure the deficiency by providing additional information to
the Secretary within the period of time, not to exceed five days from the date
such deficiency notice is given to the Proponent, determined by the Board of
Directors, such committee or such officer. If the deficiency is not cured within
such period, or if the Board of Directors, such committee or such officer
determines that the additional information provided by
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the Proponent, together with the information previously provided, does not
satisfy the requirements of this Section 1.11 or is otherwise not in accordance
with applicable law, then such Stockholder Proposal shall not be presented for
action at the stockholders' meeting in question.
(b) Only persons who are selected and recommended by the Board of
Directors or the nominating committee thereof, or who are nominated by the
stockholders in accordance with the procedures set forth in this Section 1.11,
shall be eligible for election or qualified to serve as directors. Nominations
of individuals for election to the Board of Directors at any annual meeting or
special meeting of the stockholders at which directors are to be elected may be
made by any stockholder of the Company entitled to vote for the election of
directors at that meeting by compliance with the procedures set forth in this
Section 1.11 except as may be otherwise provided in the Certificate of
Incorporation with respect to the right of holders of Preferred Stock of the
Company to nominate and elect a specified number of directors in certain
circumstances. Nominations by stockholders shall be made by written notice (a
"Nomination Notice"), which shall set forth (i) as to each individual nominated
(A) the name, date of birth, business address and residence address of such
nominee; (B) the business experience during the past five years of such nominee,
including his or her principal occupations or employment during such period, the
name and principal business of any company or other organization in which such
occupations and employment were carried on, and such other information as to the
nature of his or her responsibilities and the level of professional competence
as may be sufficient to permit assessment of his or her prior business
experience; (C) whether the nominee is or has ever been at any time a director,
officer or owner of 5% or more of any class of capital stock, partnership
interests or other equity interest of any Company, partnership or other entity;
(D) any directorships held by such nominee in any company with a class of
securities registered pursuant to section 12 of the Exchange Act or subject to
the requirements of section 15(d) of the Exchange Act or any company registered
as an investment company under the Investment Company Act of 1940, as amended;
(E) whether, in the last five years, such nominee has been convicted in a
criminal proceeding or has been subject to a judgment, order, finding or decree
of any federal, state or other governmental entity, concerning any violation of
federal, state, or other law, or any proceeding in bankruptcy, which conviction,
judgment, order, finding, decree or proceeding may be material to the evaluation
of the ability or integrity of the nominee; and (F) any other information
relating to the nominee that would be required to be disclosed in a proxy
statement or other filings required to be made in connection with solicitations
of proxies for election of directors pursuant to section 14 of the Exchange Act,
and the rules and regulations promulgated thereunder; and (ii) as to the person
submitting the Nomination Notice and any Person acting in concert with such
Person, (w) the name and business address of such person and Persons, (x) the
name and business address of such person and Persons as they appear on the books
of the Company (if they so appear); (y) the class and number of shares of the
Company which are beneficially owned by such person and Persons, and (z) any
other information relating to such stockholder that would be required to be
disclosed in a proxy statement or other filings required to be made in
connection with solicitations of proxies for election of directors pursuant to
section
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14 of the Exchange Act and the rules and regulations promulgated thereunder. A
written consent to being named in a proxy statement as a nominee, and to serve
as a director if elected, signed by the nominee, shall be filed with any
Nomination Notice. If the presiding officer at any stockholders' meeting
determines that a nomination was not made in accordance with the procedures
prescribed by these By-laws, the officer shall so declare to the meeting and the
defective nomination shall be disregarded.
(c) Nomination Notices and Stockholder Proposals must be delivered to
the Secretary at the principal executive office of the Company or mailed and
received at the principal executive offices of the Company (a) in the case of
any annual meeting, 120 days prior to the anniversary date of the immediately
preceding annual meeting of stockholders; provided, however, that the event that
the annual meeting is called for a date that is not within 30 days before or 60
days after such anniversary date, notice by the stockholder in order to be
timely must be so received no later than the close of business on the tenth day
following the day on which notice of the date of the annual meeting was mailed
or public disclosure of the date of the annual meeting was made, whichever first
occurs; and (b) in the case of a special meeting of stockholders called for the
purpose of electing directors, not later than the close of business on the tenth
day following the day on which notice of the date of the special meeting was
mailed or public disclosure of the date of the special meeting was made,
whichever first occurs.
ARTICLE 2 - Directors
2.1 General Powers. The business and affairs of the Company shall be
managed by or under the direction of a Board of Directors, who may exercise all
of the powers of the Company except as otherwise provided by law, the
Certificate of Incorporation or these By-Laws. In the event of a vacancy in the
Board of Directors, the remaining directors, except as otherwise provided by
law, may exercise the powers of the full Board until the vacancy is filled.
2.2 Number; Election and Qualification. The number of directors which
shall constitute the whole Board of Directors shall be determined by resolution
of the Board of Directors, but in no event shall be less than one. The number of
directors may be decreased at any time and from time to time by a majority of
the directors then in office, but only to eliminate vacancies existing by reason
of the death, resignation, removal or expiration of the term of one of more
directors. Unless otherwise provided in the Certificate of Incorporation, the
Board of Directors shall divide the directors into three classes, which shall be
as equal in number as possible; and, when the number of directors is changed,
shall determine the class or classes to which the increased or decreased number
of directors shall be apportioned, which shall be done so as to maintain as
equal a number of directors in each class as possible; provided, however, that
no decrease in the number of directors shall affect the term of any director
then in office. Directors need not be stockholders of the Company.
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2.3 Enlargement of the Board. The number of directors may be increased
at any time and from time to time by a majority of the directors then in office.
2.4 Tenure. The directors shall be elected at the annual meeting of
stockholders by such stockholders as have the right to vote on such election. At
each annual meeting of stockholders, directors elected to succeed those whose
terms are expiring shall be elected for a term of office expiring at the annual
meeting of stockholders held in the third year following their election and
until their respective successors are elected and qualified, or until such
director's earlier death, resignation or removal.
2.5 Vacancies. Any vacancy in the Board of Directors, however
occurring, including a vacancy resulting from an enlargement of the Board, may
be filled by vote of a majority of the directors then in office, although less
than a quorum, or by a sole remaining director. A director elected to fill a
vacancy shall be elected for the unexpired term of his or her predecessor in
office, and a director chosen to fill a position resulting from an increase in
the number of directors shall hold office until the next annual meeting of
stockholders and until his or her successor is elected and qualified, or until
his or her earlier death, resignation or removal.
2.6 Resignation. Any director may resign by delivering written
resignation to the Company at its principal office or to the President or
Secretary. Such resignation shall be effective upon receipt unless it is
specified to be effective at some other time or upon the happening of some other
event.
2.7 Regular Meetings. Provided that meetings are held at least once
during each of the Company's fiscal quarters, regular meetings of the Board of
Directors may be held without notice at such time and place, either within or
without the State of Delaware, as shall be determined from time to time by the
Board of Directors; provided that any director who is absent when such a
determination is made shall be given notice of the determination. A regular
meeting of the Board of Directors may be held without notice immediately after
and at the same place as the annual meeting of stockholders.
2.8 Special Meetings. Special meetings of the Board of Directors may
be held at any time and place, within or without the State of Delaware,
designated in a call by any member of the Board of Directors, the Chief
Executive Officer or the President of the Company.
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2.9 Notice of Special Meetings. Notice of any special meeting of the
Board of Directors shall be given to each director by the Secretary or by the
officer or one of the directors calling the meeting. Notice shall be duly given
to each director (i) by giving notice to such director in person or by telephone
at least 24 hours in advance of the meeting, (ii) by sending a facsimile,
telegram or telex, or delivering written notice by hand, to his or her last
known business or home address at least 24 hours in advance of the meeting, or
(iii) by mailing written notice to his or her last known business or home
address at least 72 hours in advance of the meeting. A notice or waiver of
notice of a meeting of the Board of Directors need not specify the purposes of
the meeting.
2.10 Meetings by Telephone Conference Calls. Directors or any members
of any committee designated by the directors may participate in a meeting of the
Board of Directors or such committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and participation by such means shall constitute
presence in person at such meeting.
2.11 Quorum. A majority of the total number of the whole Board of
Directors shall constitute a quorum at all meetings of the Board of Directors.
In the event one or more of the directors shall be disqualified to vote at any
meeting, then the required quorum shall be reduced by one for each such director
so disqualified; provided, however, that in no case shall less than one-third
(1/3) of the number so fixed constitute a quorum. In the absence of a quorum at
any such meeting, a majority of the directors present may adjourn the meeting
from time to time without further notice other than announcement at the meeting,
until a quorum shall be present
2.12 Action at Meeting. At any meeting of the Board of Directors at
which a quorum is present, the vote of a majority of those present shall be
sufficient to take any action, unless a different vote is specified by law, the
Certificate of Incorporation or these By-Laws.
2.13 Action by Consent. Any action required or permitted to be taken at
any meeting of the Board of Directors or of any committee of the Board of
Directors may be taken without a meeting, if all members of the Board or
committee, as the case may be, consent to the action in writing, and the written
consents are filed with the minutes of proceedings of the Board or committee.
2.14 Removal. Any one or more or all of the directors may be removed,
with or without cause, by the holders of a majority of the shares then entitled
to vote at an election of directors, except that the directors elected by the
holders of a particular class or series of stock may be removed without cause
only by vote of the holders of a majority of the outstanding shares of such
class or series.
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2.15 Committees. The Board of Directors may, by resolution passed by a
majority of the whole Board, designate one or more committees, each committee to
consist of one or more of the directors of the Company. The Board may designate
one or more directors as alternate members of any committee, who may replace any
absent or disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members of the
committee present at any meeting and not disqualified from voting, whether or
not he, she or they constitute a quorum, may unanimously appoint another member
of the Board of Directors to act at the meeting in the place of any such absent
or disqualified member. Any such committee, to the extent provided in the
resolution of the Board of Directors and subject to the provisions of the
General Company Law of the State of Delaware, shall have and may exercise all
the powers and authority of the Board of Directors in the management of the
business and affairs of the Company and may authorize the seal of the Company to
be affixed to all papers which may require it. Each such committee shall keep
minutes and make such reports as the Board of Directors may from time to time
request. Except as the Board of Directors may otherwise determine, any committee
may make rules for the conduct of its business, but unless otherwise provided by
the directors or in such rules, its business shall be conducted as nearly as
possible in the same manner as is provided in these By-Laws for the Board of
Directors.
2.16 Compensation of Directors. Directors may be paid such compensation
for their services and such reimbursement for expenses of attendance at meetings
as the Board of Directors may from time to time determine. No such payment shall
preclude any director from serving the Company or any of its parent or
subsidiary Companies in any other capacity and receiving compensation for such
service.
ARTICLE 3 - Officers
3.1 Enumeration. The officers of the Company shall consist of a
President, a Chief Executive Officer, a Secretary, a Treasurer and such other
officers with such other titles as the Board of Directors shall determine,
including a Chairman of the Board, a Vice-Chairman of the Board, and one or more
Vice Presidents, Assistant Treasurers, and Assistant Secretaries. The Board of
Directors may appoint such other officers as it may deem appropriate.
3.2 Election. The President, Treasurer and Secretary shall be elected
annually by the Board of Directors at its first meeting following the annual
meeting of stockholders. Other officers may be appointed by the Board of
Directors at such meeting or at any other meeting.
3.3 Qualification. No officer need be a stockholder. Any two or more
offices may be held by the same person.
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3.4 Tenure. Except as otherwise provided by law, by the Certificate of
Incorporation or by these By-Laws, each officer shall hold office until his or
her successor is elected and qualified, unless a different term is specified in
the vote choosing or appointing him or her, or until his or her earlier death,
resignation or removal.
3.5 Resignation and Removal. Any officer may resign by delivering a
written resignation to the Company at its principal office or to the President
or Secretary. Such resignation shall be effective upon receipt unless it is
specified to be effective at some other time or upon the happening of some other
event.
Any officer may be removed at any time, with or without cause, by vote of
a majority of the entire number of directors then in office.
Except as the Board of Directors may otherwise determine, no officer who
resigns or is removed shall have any right to any compensation as an officer for
any period following such officer's resignation or removal, or any right to
damages on account of such removal, whether such officer's compensation be by
the month or by the year or otherwise, unless such compensation is expressly
provided in a duly authorized written agreement with the Company.
3.6 Vacancies. The Board of Directors may fill any vacancy occurring
in any office for any reason and may, in its discretion, leave unfilled for such
period as it may determine any offices other than those of President, Treasurer
and Secretary. Each such successor shall hold office for the unexpired term of
his or her predecessor and until his or her successor is elected and qualified,
or until his or her earlier death, resignation or removal.
3.7 Chairman of the Board and Vice-Chairman of the Board. If the Board
of Directors appoints a Chairman of the Board, he or she shall perform such
duties and possess such powers as are assigned to him or her by the Board of
Directors. If the Board of Directors appoints a Vice-Chairman of the Board, he
or she shall, in the absence or disability of the Chairman of the Board, perform
the duties and exercise the powers of the Chairman of the Board and shall
perform such other duties and possess such other powers as may from time to time
be vested in him or her by the Board of Directors.
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3.8 President. Unless the Board of Directors otherwise determines, the
President shall be the Chief Operating Officer of the Company. Unless the Board
of Directors has designated the Chairman of the Board as Chief Executive
Officer, the President shall also be the Chief Executive Officer of the Company.
The President shall, subject to the direction of the Board of Directors, have
general charge and supervision of the business of the Company. Unless otherwise
provided by the Board of Directors, the President shall preside at all meetings
of the stockholders, if the President is a director, at all meetings of the
Board of Directors. The President shall perform such other duties and shall have
such other powers as the Board of Directors may from time to time prescribe.
3.9 Chief Executive Officer. The Chief Executive Officer, subject to
the direction of the Board of Directors, shall have general and active
management of the business of the Company and shall see that all orders and
resolutions of the Board of Directors are carried into effect.
3.10 Vice Presidents. Any Vice President shall perform such duties and
possess such powers as the Board of Directors or the President may from time to
time prescribe. In the event of the absence, inability or refusal to act of the
President, the Vice President (or if there shall be more than one, the Vice
Presidents in the order determined by the Board of Directors) shall perform the
duties of the President and when so performing shall have all the powers of and
be subject to all the restrictions upon the President. The Board of Directors
may assign to any Vice President the title of Executive Vice President, Senior
Vice President or any other title selected by the Board of Directors.
3.11 Secretary and Assistant Secretaries. The Secretary shall perform
such duties and shall have such powers as the Board of Directors or the
President may from time to time prescribe. In addition, the Secretary shall
perform such duties and have such powers as are incident to the office of the
secretary, including without limitation the duty and power to give notices of
all meetings of stockholders and special meetings of the Board of Directors, to
attend all meetings of stockholders and the Board of Directors and keep a record
of the proceedings, to maintain a stock ledger and prepare lists of stockholders
and their addresses as required, to be custodian of corporate records and the
corporate seal and to affix and attest to the same on documents.
Any Assistant Secretary shall perform such duties and possess such powers
as the Board of Directors, the President or the Secretary may from time to time
prescribe. In the event of the absence, inability or refusal to act of the
Secretary, the Assistant Secretary, (or if there shall be more than one, the
Assistant Secretaries in the order determined by the Board of Directors) shall
perform the duties and exercise the powers of the Secretary.
In the absence of the Secretary or any Assistant Secretary at any meeting
of stockholders or directors, the person presiding at the meeting shall
designate a temporary secretary to keep a record of the meeting.
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3.12 Treasurer and Assistant Treasurers. The Treasurer shall perform
such duties and shall have such powers as may from time to time be assigned to
him or her by the Board of Directors or the President. In addition, the
Treasurer shall perform such duties and have such powers as are incident to the
office of treasurer, including without limitation the duty and power to keep and
be responsible for all funds and securities of the Company, to deposit funds of
the Company in depositories selected in accordance with these By-Laws, to
disburse such funds as ordered by the Board of Directors, to make proper
accounts of such funds, and to render as required by the Board of Directors
statements of all such transactions and of the financial condition of the
Company.
The Assistant Treasurers shall perform such duties and possess such
powers as the Board of Directors, the President or the Treasurer may from time
to time prescribe. In the event of the absence, inability, or refusal to act of
the Treasurer, the Assistant Treasurer, (or if there shall be more than one, the
Assistant Treasurers in the order determined by the Board of Directors) shall
perform the duties and exercise the powers of the Treasurer.
ARTICLE 4 - Capital Stock
4.1 Issuance of Stock. Unless otherwise voted by the stockholders and
subject to the provisions of the Certificate of Incorporation, the whole or any
part of any unissued balance of the authorized capital stock of the Company or
the whole or any part of any unissued balance of the authorized capital stock of
the Company held in its treasury may be issued, sold, transferred or otherwise
disposed of by vote of the Board of Directors in such manner, for such
consideration and on such terms as the Board of Directors may determine.
4.2 Certificates of Stock. Every holder of stock of the Company shall
be entitled to have a certificate, in such form as may be prescribed by law and
by the Board of Directors, certifying the number and class of shares owned by
such stockholder in the Company. Each such certificate shall be signed by, or in
the name of the Company by, the Chairman or Vice-Chairman, if any, of the Board
of Directors, or the President or a Vice President, and the Treasurer or an
Assistant Treasurer, or the Secretary or an Assistant Secretary of the Company.
Any or all of the signatures on the certificate may be a facsimile.
Each certificate for shares of stock which are subject to any restriction
on transfer pursuant to the Certificate of Incorporation, the By-Laws,
applicable securities laws or any agreement among any number of shareholders or
among such holders and the Company shall have conspicuously noted on the face or
back of the certificate either the full text of the restriction or a statement
of the existence of such restriction.
4.3 Transfers. Except as otherwise established by rules and
regulations adopted by the Board of Directors, and subject to applicable law,
shares of stock may be transferred on the
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books of the Company by the surrender to the Company or its transfer agent of
the certificate representing such shares properly endorsed or accompanied by a
written assignment or power of attorney properly executed, and with such proof
of authority or the authenticity of signature as the Company or its transfer
agent may reasonably require. Except as may be otherwise required by law, by the
Certificate of Incorporation or by these By-Laws, the Company shall be entitled
to treat the record holder of stock as shown on its books as the owner of such
stock for all purposes, including the payment of dividends and the right to vote
with respect to such stock, regardless of any transfer, pledge or other
disposition of such stock until the shares have been transferred on the books of
the Company in accordance with the requirements of these By-Laws.
4.4 Lost, Stolen or Destroyed Certificates. The Company may issue a
new certificate of stock in place of any previously issued certificate alleged
to have been lost, stolen, or destroyed, upon such terms and conditions as the
Board of Directors may prescribe, including the presentation of reasonable
evidence of such loss, theft or destruction and the giving of such indemnity as
the Board of Directors may require for the protection of the Company or any
transfer agent or registrar.
4.5 Record Date. The Board of Directors may fix in advance a date as a
record date for the determination of the stockholders entitled to notice of or
to vote at any meeting of stockholders or to express consent (or dissent) to
corporate action in writing without a meeting, or entitled to receive payment of
any dividend or other distribution or allotment of any rights in respect of any
change, conversion or exchange of stock, or for the purpose of any other lawful
action. Such record date shall not be more than 60 nor less than 10 days before
the date of such meeting, nor more than 60 days prior to any other action to
which such record date relates.
If no record date is fixed, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the day before the day on which notice is given, or, if
notice is waived, at the close of business on the day before the day on which
the meeting is held. The record date for determining stockholders entitled to
express consent to corporate action in writing without a meeting, when no prior
action by the Board of Directors is necessary, shall be the day on which the
first written consent is expressed. The record date for determining stockholders
for any other purpose shall be at the close of business on the day on which the
Board of Directors adopts the resolution relating to such purpose.
A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
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ARTICLE 5 - Indemnification
5.1 Indemnification in Actions, Suits or Proceedings Other Than Those
by or in the Right of the Company. (a) The Company shall indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding (whether civil, criminal,
administrative or investigative) by reason of the fact that such person is or
was a director or officer of the Company, or is or was serving at the request of
the Company as a director or officer of another company, partnership, joint
venture, trust, employee benefit plan or other enterprise, against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding, if such person acted in good faith and in a manner which
such person reasonably believed to be in or not opposed to the best interests of
the Company, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe that such conduct was unlawful. The termination of
any action, suit or proceeding by judgment, order, settlement, conviction, or
upon a plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner which such
person reasonably believed to be in or not opposed to the best interests of the
Company, and, with respect to any criminal action or proceeding, had reasonable
cause to believe that such conduct was unlawful.
(b) The Company may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding (whether civil, criminal, administrative or investigative) by
reason of the fact that such person is or was an employee or agent of the
Company, or is or was serving at the request of the Company as an employee or
agent of another company, partnership, joint venture, trust, employee benefit
plan or other enterprise, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by such person in connection with such action, suit or proceeding, if such
person acted in good faith and in a manner which such person reasonably believed
to be in or not opposed to the best interests of the Company, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe that
such conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which such person reasonably believed to
be in or not opposed to the best interests of the Company, and, with respect to
any criminal action or proceeding, had reasonable cause to believe that such
conduct was unlawful.
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<PAGE> 14
5.2 Indemnification in Actions, Suits or Proceedings by or in the
Right of the Company. (a) The Company shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding by or in the right of the Company to
procure a judgment in its favor by reason of the fact that such person is or was
a director or officer of the Company, or is or was serving at the request of the
Company as a director of officer of another company, partnership, joint venture,
trust, employee benefit plan or other enterprise, against expenses (including
attorneys' fees) actually and reasonably incurred by such person in connection
with the defense or settlement of such action or suit if such person acted in
good faith and in a manner which such person reasonably believed to be in or not
opposed to the best interest of the Company. No such indemnification shall be
made in respect of any claim, issue or matter as to which such person shall have
been adjudged to be liable to the Company unless and only to the extent that the
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all the circumstances
of the case, such person is fairly and reasonably entitled to indemnity for such
expenses which such court shall deem proper.
(b) The Company may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding by or in the right of the Company to procure a judgment in
its favor by reason of the fact that such person is or was an employee or agent
of the Company, or is or was serving at the request of the Company as an
employee or agent of another company, partnership, joint venture, trust,
employee benefit plan or other enterprise, against expenses (including
attorneys' fees) actually and reasonably incurred by such person in connection
with the defense or settlement of such action or suit if such person acted in
good faith and in a manner which such person reasonably believed to be in or not
opposed to the best interests of the Company. No such indemnification shall be
made in respect of any claim, issue or matter as to which such person shall have
been adjudged to be liable to the Company unless and only to the extent that the
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all the circumstances
of the case, such person is fairly and reasonably entitled to indemnity for such
expenses which such court shall deem proper.
5.3 Authorization of Indemnification. Any indemnification under this
Article 5 shall be made by the Company only as authorized in the specific case
upon a determination that indemnification of the director, officer, employee or
agent is proper in the circumstances because such person or persons have met the
applicable standard of conduct set forth in Sections 5.1 and 5.2 hereof. Such
determination shall be made (1) by a majority vote of the directors who are not
parties to such action, suit or proceeding, even though less than a quorum, or
(2) if there are no such directors, or if such directors so direct, by
independent legal counsel in a written opinion, or (3) by the stockholders.
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5.4 Advancement of Expenses. The Company may advance expenses
(including attorneys' fees) incurred by a director or officer in advance of the
final disposition of such action, suit or proceeding upon the receipt of an
undertaking by or on behalf of the director of officer to repay such amount if
it shall ultimately be determined that such director or officer is not entitled
to indemnification. The Company may advance expenses (including attorneys' fees)
incurred by an employee or agent in advance of the final disposition of such
action, suit or proceeding upon such terms and conditions, if any, as the Board
of Directors deems appropriate.
5.5 Claims. If a claim for indemnification or payment of expenses
under this Article 5 is not paid with 60 days after a written claim therefor is
received by the Company, the claimant may recover the unpaid amount of such
claim and, if successful in whole or in part, shall be entitled to be paid the
expense of prosecuting the claim. In any such action, the Company shall have the
burden of proving that the claimant was not entitled to the requested
indemnification or payment of expenses under applicable law.
5.6 Insurance. The Company shall have power to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the Company, or is or was serving at the request of the Company as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him or
her and incurred by him or her in any such capacity, or arising out of his or
her status as such, whether or not the Company would have the power to indemnify
him or her against such liability under the provisions of this Article.
5.7 No stockholder shall bring any action or lawsuit against the
Company, any of its subsidiaries or its affiliates, or any officer or director
thereof (in their respective capacities), unless such stockholder and any person
controlling such stockholder shall have entered into a written agreement with
the Company, reasonably satisfactory to it, requiring the losing party, and any
person controlling the stockholder, if the stockholder shall be the losing
party, to pay to the prevailing party the attorneys' fees and expenses incurred
by the prevailing party in such action. As used in this provision, the term
"person" shall have the same meaning given it in Section 13(d) of the Securities
Exchange Act of 1934 ("Exchange Act"), and the terms "affiliate" and
"controlling" shall have the same meanings given them in Rule 12b-2 under the
Exchange Act.
ARTICLE 6 - General Provisions
6.1 Fiscal Year. Except as from time to time otherwise designated by
the Board of Directors, the fiscal year of the Company shall begin on the first
day of January in each year and end on the last day of December in each year.
6.2 Corporate Seal. The corporate seal shall be in such form as shall
be approved by the Board of Directors.
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6.3 Waiver of Notice. Whenever any notice whatsoever is required to be
given by law, by the Certificate of Incorporation or by these By-Laws, a waiver
of such notice either in writing signed by the person entitled to such notice or
such person's duly authorized attorney, or by telegraph, cable or any other
available method, whether before, at or after the time stated in such waiver, or
the appearance of such person or persons at such meeting in person or by proxy,
shall be deemed equivalent to such notice.
6.4 Voting of Securities. Except as the directors may otherwise
designate, the President or Treasurer may waive notice of, and act as, or
appoint any person or persons to act as, proxy or attorney-in-fact for this
Company (with or without power of substitution) at, any meeting of stockholders
or shareholders of any other Company or organization, the securities of which
may be held by this Company.
6.5 Evidence of Authority. A certificate by the Secretary, or an
Assistant Secretary, or a temporary Secretary as to any action taken by the
stockholders, directors, a committee or any officer or representative of the
Company shall as to all persons who rely on the certificate in good faith be
conclusive evidence of such action.
6.6 Certificate of Incorporation. All references in these By-Laws to
the Certificate of Incorporation shall be deemed to refer to the Certificate of
Incorporation of the Company, as amended and in effect from time to time.
6.7 Transactions with Interested Parties. No contract or transaction
between the Company and one or more of the directors or officers, or between the
Company and any other Company, partnership, association, another organization in
which one or more of the directors or officers are directors or officers, or
have a financial interest, shall be void or voidable solely for this reason, or
solely because the director or officer is present at or participates in the
meeting of the Board of Directors or a committee of the Board of Directors which
authorizes the contract or transaction or solely because his, her or their votes
are counted for such purpose, if:
(1) The material facts as to his or her relationship or
interest and as to the contract or transaction are
disclosed or are known to the Board of Directors or the
committee, and the Board or committee in good faith
authorizes the contract or transaction by the affirmative
votes of a majority of the disinterested directors, even
though the disinterested directors be less than a quorum;
(2) The material facts as to such his or her relationship or
interest and as to the contract or transaction are
disclosed or are known to the stockholders entitled to vote
thereon, and the contract or transaction is specifically
approved in good faith by vote of the stockholders; or
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<PAGE> 17
(3) The contract or transaction is fair as to the Company as of
the time it is authorized, approved or, ratified, by the
Board of Directors, a committee of the Board of Directors,
or the stockholders.
Common or interested directors may be counted in determining the presence
of a quorum at a meeting of the Board of Directors or of a committee which
authorizes the contract or transaction.
6.8 Severability. Any determination that any provision of these
By-Laws is for any reason inapplicable, illegal or ineffective shall not affect
or invalidate any other provision of these By-Laws.
6.9 Pronouns. All pronouns used in these By-Laws shall be deemed to
refer to the masculine, feminine or neuter, singular or plural, as the identity
of the person or persons may require.
ARTICLE 7 - Amendments
7.1 By the Board of Directors. These By-Laws may be altered, amended
or repealed or new by-laws may be adopted by the affirmative vote of a majority
of the directors present at any regular or special meeting of the Board of
Directors at which a quorum is present.
7.2 By the Stockholders. These By-Laws may be altered, amended or
repealed or new by-laws may be adopted by the affirmative vote of the holders of
a majority of the shares of the capital stock of the Company issued and
outstanding and entitled to vote at any regular meeting of stockholders, or at
any special meeting of stockholders, provided notice of such alteration,
amendment, repeal or adoption of new by-laws shall have been stated in the
notice of such special meeting. Notwithstanding the foregoing, the affirmative
vote of the holders of at least 66-2/3% of the outstanding capital stock
entitled to vote thereon shall be required to alter, amend or repeal
Sections 2.2 and 2.3 of Article 2 or this Article 7.
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<PAGE> 1
Exhibit 5.1
[PIPER MARBURY RUDNICK & WOLFE LLP LETTERHEAD]
January 13, 2000
Net2000 Communications, Inc.
2180 Fox Mill Road
Herndon, Virginia 20171
Gentlemen:
We have assisted in the preparation and filing with the Securities and
Exchange Commission of a Registration Statement on Form S-1, file No. 333-91987
(the "Registration Statement"), relating to 11,500,000 shares of Common Stock
(including 1,500,000 shares to cover over-allotments, if any), $.01 par value
per share, of Net2000 Communications, Inc., a Delaware corporation (the
"Company"), to be offered to the public.
We have examined the Amended and Restated Certificate of Incorporation
and the Amended and Restated Bylaws of the Company, and all amendments thereto,
and have examined and relied upon the originals, or copies certified to our
satisfaction, of such records of meetings of the directors and stockholders of
the Company, documents and other instruments as in our judgment are necessary or
appropriate to enable us to render the opinions expressed below.
In examining the foregoing documents, we have assumed the genuineness
of all signatures and the authenticity of all documents submitted to us as
originals, the conformity to original documents of all documents submitted to us
as certified or photostatic copies, and the authenticity of the originals of
such latter documents.
Based on the foregoing, we are of the opinion that the shares of Common
Stock have been duly authorized for issuance and, after payment therefor in
advance and in accordance with the terms and provisions of the Underwriting
Agreement among the Company, Goldman, Sachs & Co., Donaldson, Lufkin & Jenrette,
J.P. Morgan & Co. and Legg Mason Wood Walker Incorporated and issuance of the
certificates therefor by the Company, will be duly and validly issued, fully
paid and nonassessable.
We hereby consent to the use of our name in the Registration Statement
and under the caption "Legal Matters" in the related Prospectus and consent to
the filing of this opinion as an exhibit to the Registration Statement.
Very truly yours,
Piper Marbury Rudnick & Wolfe LLP
<PAGE> 1
EXHIBIT 10.7
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as
of the 15th day of November, 1999 by and between Net2000 Communications, Inc.
(the "Employer") and Clyde A. Heintzelman (the "Executive").
WITNESSETH:
WHEREAS:
(1) Employer desires to retain Executive's services, upon the terms and
conditions hereafter described, and Executive desires to be employed by
Employer upon such terms and conditions;
(2) Executive understands and acknowledges that, in connection with this
proposed employment Executive will meet important customers and referral
sources of Employer, and learn of confidential business information, ways
of doing business, and trade secrets of Employer of which Executive was
not aware, and that accordingly Executive's agreement to and compliance
with the covenants and terms set forth in Sections 7 and 8 of this
Agreement are a material and essential condition to Employer's agreement
to employ Executive;
NOW, THEREFORE, in consideration of the premises, and the promises,
covenants and agreements hereinafter described, Employer and Executive agree as
follows:
1. Employment. Employer hereby employs Executive, and Executive hereby
accepts employment with Employer, upon and subject to the terms and conditions
set forth in this Agreement. Employer shall at all times during Executive's
employment recommend that the Board of Directors ("the Board") nominate
Executive for a seat on Employer's Board of Directors and use its reasonable
efforts to cause Executive to be elected to the Board.
2. Duties. (a) Executive shall serve as the President, and perform, under
and according to Employer's the Chief Executive Officer's ("CEO's") direction
and control and to the best of Executive's abilities, all executive, advisory,
administrative, and/or managerial duties (if any) which may be assigned or
delegated to Executive from time to time by the CEO of Employer. Executive shall
carry out, follow and comply with all directives, rules, and policies of
Employer and the Board, and shall have the authority and responsibilities
customarily exercised by a President, subject to the CEO's direction and
control, and without additional compensation shall provide services to, and
serve as an officer and/or director of, any subsidiary, affiliate or other
business or venture in which Employer may hold an interest, as the CEO may
direct. Executive's responsibilities shall include, without limitation, the
following duties:
- - Managing all day to day operations of the Company;
<PAGE> 2
- - Meet corporate objectives for top line revenue, gross margin, and
customer retention;
- - Leadership in setting strategy for new markets, product development,
pricing, and differentiation while executing customer acquisition and
retention for retail, carrier and alternate channel sales;
- - Further develop the sales and marketing organizations as required to
effectuate sales success;
- - Work to develop, implement or improve processes, procedures and systems
necessary to facilitate the order entry, provisioning, billing and customer
care functions in support of our business;
- - Work with IT to lead Sales Force Automation including database management,
pricing tools and assist with customer relationship management initiatives;
and Manage P/L to budget.
(b) Executive shall exert Executive's best efforts and devote
substantially all of Executive's working time, attention and energies to
Employer's business and the performance of Executive duties, and shall not
engage in any other business activity, whether or not such employment or
business activity is pursued for gain, profit or other pecuniary advantage,
without Employer's express prior written consent; provided, however, that (1)
Executive may serve on the board of directors of other corporations provided
such activities and service do not violate any other covenant or term of this
Agreement, interfere with the performance of Executive's duties for Employer, or
create a conflict of interest or the appearance of a conflict of interest with
respect to Employer or be inconsistent with any of Employer's policies as may be
amended from time to time; (2) if the same does not violate any other covenant
or term of this Agreement, Executive may invest Executive's personal assets in
any form or manner so long as it does not require Executive's services in the
operation of any business in which such investment is made (but nothing in this
Agreement shall restrict Executive's right to invest in Employer or the Company
(defined below)).
(c) During his employment hereunder, Executive agrees not to engage
in any other employment or engage in activity at any time during his employment
that interferes with the performance of his duties for Employer. Executive also
agrees to enter into and abide by any agreements generally executed by the
stockholders and other executives of Employer, such as a stock trading
standstill agreement in connection with an initial public offering of Employer's
stock.
(d) Executive hereby represents to Employer that his performance of
all of the terms of this Agreement and his performance as an employee do not and
will not breach any agreement to keep in confidence proprietary information
which he has acquired from any third party in confidence or in trust prior to
his employment by Employer. Executive also represents that he has not entered
into, and agrees that he will not enter into, any agreement either written or
oral in conflict with the terms of this Agreement
3. Term of Employment.
(a) Executive's employment with Employer commences as of the date
first written above, and unless earlier terminated pursuant to the provisions of
Section 3(b), terminates at the close of business on November 14, 2001 (the
"Term"), provided, however, that commencing on
<PAGE> 3
November 14, 2001, and on each annual anniversary of such date (such date and
each annual anniversary being called a "Renewal Date"), this Agreement
automatically shall extend for an additional one-year period upon the terms
described in this paragraph, unless 60 days or more prior to the Renewal Date,
either party gives notice to the other in accordance with Section 14 that such
party elects not to renew the employment term. If such notice of non-renewal is
given, then Executive's employment shall terminate at the expiration of the then
current term. In the case of each such renewal (i) Executive shall be
compensated as set out in Section 4(a)-(b); and (ii) all other terms of this
Agreement (including those respecting termination) shall remain in full force
and effect. The parties acknowledge their intentions that the foregoing
provisions could (through the failure to elect not to renew or to exercise
rights under Section 3(b)) result in a perpetual employment without any definite
duration during Executive's life.
(b) Notwithstanding the foregoing, prior to the expiration of the
Term (as the same may be extended) (i) Employer may terminate Executive's
employment, without prior notice, for "Cause". For purposes of this Agreement,
grounds for termination for "Cause" include: (1) Executive's failure or refusal
to perform any stated duty; (2) misconduct or dishonesty by Executive in
connection with the performance of this Agreement or any other of Executive's
duties hereunder; (3) disloyalty, misappropriation of funds by Executive,
Executive being convicted of a felony or crime involving moral turpitude, or
fraudulent or unethical conduct by Executive related to or affecting Executive's
employment; (4) failure of Executive to meet or achieve specific business plans
or objectives as determined by the CEO or Board of Employer and which have been
made known to Executive (which is not remedied within 10 days after written
notice of the same is given by Employer); or (5) any other breach of this
Agreement by Executive (which is not remedied within 10 days after written
notice of the same is given by Employer); (ii) Executive's employment terminates
immediately upon Executive's death; (iii) Executive's employment may be
terminated, at Employer's option, if, due to physical or mental illness, injury,
or condition Executive is unable to perform any essential function of
Executive's position with reasonable accommodation for a period of more than 90
consecutive days; (iv) Executive may terminate his employment for "Good Reason"
(meaning: (x) any violation of a term of this Agreement by Employer which is not
remedied within 10 days after written notice of the same is given by Executive;
or (y) the assignment of Executive to duties which result in a substantial
diminution of Executive's position, duties or responsibilities as provided for
in this Agreement (excluding an isolated and inadvertent action which is
remedied by Employer within 10 days after written notice of the same is given by
Executive or a temporary or occasional assignment by the Board or the Chairman
made for reasons of business necessity in the good faith judgment of the Board
or its Chairman); or (z) without Executive's consent, relocation in excess of
eight (8) miles of Executive from Employer's corporate offices in the Herndon,
Virginia area.
(c) Upon termination of Executive's employment hereunder, Executive
shall be entitled only to receive any compensation accrued but unpaid as of such
date, and shall deliver to Employer all property of Employer. However, in the
event Executive validly terminates his employment prior to the expiration of the
Term for Good Reason (as defined above), or Executive's employment is terminated
pursuant to Section 3 (b)(ii) or (iii), then, notwithstanding the provisions of
Section 4(b), Executive shall be eligible to receive as and when described
below, with respect to the year in which employment terminates, the pro-rated
portion of the Executive's Bonus under the
<PAGE> 4
bonus plan for Executive in effect for that year provided the performance goals
for that Bonus plan for the entire year are in fact achieved. The pro-rated
portion shall be paid at the same time the Bonus otherwise would have been
payable under the Agreement if Executive had remained in Employer's employ, and
shall be equal to a percentage of the Bonus equal to the percentage of the
fiscal year during which Executive was employed by Employer.
(d) If Executive validly terminates Executive's employment for Good
Reason as described above, or if Employer terminates Executive's employment
(excluding a termination under Section 3(b)(i), (ii) or (iii)) without Cause or
in violation of this Agreement prior to the expiration of the Term, then
Executive shall be entitled to receive, as and when described below, an amount
equal to the then current rate of Base Salary being paid to Employer (excluding
bonuses, benefits, or other compensation), provided that during the time
payments are being made to Executive, Executive complies with the provisions of
Sections 7 and 8 whether or not they otherwise would be enforceable, and
provided further that Executive first executes and delivers to Employer a
document in form and substance satisfactory to Employer, releasing, waiving, and
agreeing not to sue on any claims or causes of action which Executive then may
have or hold against Employer, the Company, or any of their respective
affiliates, employees, directors, insurers or agents arising out of or relating
to Executive's employment, this Agreement or its termination, or any facts
occurring prior to that date, and all conditions to making that release and
waiver legally effective have been satisfied. This sum will be paid out in 12
equal consecutive monthly installments on the Employer's regular monthly
paydays, commencing with the month following the month Executive's employment
terminates and all such conditions have been satisfied. These payments are in
addition to any prorated bonus to which Executive may be entitled under the
provisions of the immediately preceding paragraph.
(e) The provisions of Sections 3, 7, 8 and 9 of this Agreement, and
any related provisions, shall survive and continue after the termination of this
Agreement and after the termination of Executive's employment.
4. Compensation. For the services rendered pursuant to this
Agreement's terms, during Executive's employment Executive shall receive the
following:
(a) Base Salary. Executive shall be compensated at an annual rate of
$190,000 ("Base Salary"). Payments will be made at least once a month on a
regular payday of Employer.
(b) Bonus. Executive shall be entitled to receive a bonus ("Bonus"),
payable and determined as described below, for each calendar year in which
Executive meets the performance goals established by the Employer's CEO after
consultation to evaluate Executive's performance for such calendar year and was
employed by Employer at the end of the year. With respect to any such Bonus plan
and goals established by Employer, Executive shall be eligible to qualify for a
bonus of at least 25% of Base Salary. The Bonus will be paid by April 15th of
the following calendar year. The Bonus for 1999 will be pro-rated at 100% of the
target based on Executive's start date of November 15, 1999.
<PAGE> 5
(c) Review. Employer will review the compensation spelled out above,
on an annual basis, to determine whether any adjustment more favorable to
Executive should be made.
(d) Withholding. Employer shall withhold from Executive's
compensation all amounts owed Employer (if any) and all amounts required to be
withheld under federal, state or local law.
(e) Benefit Plans, Vacation. During Executive's employment with
Employer, Employer will pay the cost of Executive's participation in any group
health insurance plan then maintained by Employer to the same limited extent
provided to employees of Employer generally. Executive will be entitled to
participate in any other benefit plan of Employer offered by Employer to its
employees generally, provided Executive is eligible to participate under the
terms of any such plan at standard rates. Executive shall be entitled to receive
three (3) weeks paid vacation per annum.
(f) Options. Executive shall be granted an option (the "Option")
under the 1999 Incentive Stock Option Plan of Net2000 Communications, Inc.
("Stock Option Plan") (the "Company"), per the terms of the Stock Option
Agreement under that Plan and the Stock Option Plan, as described below. The
Option will be to purchase Two Hundred Seventy-Five Thousand (275,000) shares of
the Company's common stock. The exercise price of these stock options will be at
a strike price of $4.00 per share. The Option will be an incentive stock option
for federal income tax purposes to the extent permitted under applicable tax
laws and regulations, and the Option shall not be convertible to a non-qualified
stock option without Executive's express consent. Notwithstanding anything to
the contrary in the Stock Option Plan: (1) one-third of the options granted
pursuant to said option agreement shall vest immediately when the option is
granted and Executive has executed and delivered this Agreement and the Stock
Option Agreement, with the balance to vest over a thirty-six month period 1/36
per month (subject to the terms of the Stock Option Plan and the Stock Option
Agreement), and (2) fifty percent (50%) of Executive's non-vested stock options
shall immediately vest and all other non-vested stock options shall vest on a
pro-rata basis over the period of six (6) months after consummation of and
closing on the sale of all or substantially all of the assets or stock of
Employer, or in the event of a "Change Of Control" involving Employer (as such
term is defined below), provided Executive then is employed by Employer. In the
event of Executive's death, the vested options granted to Executive may be
exercised by his personal representative to the extent otherwise exercisable by
Executive under the terms of the applicable plan and option agreement.
(g) For the purpose of this Section 4(f), a "Change of Control"
shall mean: The acquisition by any individual, entity or group within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act") (a "Person") of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of 50% or more of
either (i) the then outstanding shares of common stock of Net2000
Communications, Inc. (the "Outstanding Company Common Stock") or (ii) the
combined voting power of the then outstanding voting securities of the Company
entitled to vote generally in the election of directors (the "outstanding
Company Voting Securities); provided, however, that for purposes of this
subsection (g), the following acquisition shall not constitute a Change of
Control; (i) any acquisitions directly from the Company (including but not
limited to an acquisition of shares from the Company), (ii) any acquisition by
the Company, and (iii) any
<PAGE> 6
acquisition by any employee benefit plan (or related trust) sponsored or
maintained by the Company or any corporation controlled by the Company.
(h) Automobile Allowance. During his employment with Employer,
Executive shall receive an automobile allowance of $500 per month.
5. Office. During Executive's employment, unless otherwise agreed
by Executive, Executive shall be entitled to an office at, and perform
Executive's duties principally out of, a corporate office maintained by
Employer in Herndon, Virginia.
6. Expenses. During Executive's employment, Employer shall reimburse
Executive for reasonable, ordinary and necessary business expenses incurred by
Executive in the performance of his duties for Employer subject to any budgetary
limitations established from time to time by Employer and provided Executive
provides such documentation and information as may then be required by
Employer's business expense reimbursement policy and as may be required to
satisfy the standards necessary to deduct such expenses for federal income tax
purposes.
7. Confidential Information.
(a) Executive acknowledges Employer is a developing company, and
that, in the course of developing its business, Employer has developed (and will
develop and/or acquire) and Executive will learn, valuable Confidential
Information (defined below), which was unknown to Executive prior to Executive's
employment, or which has been developed by Executive on behalf of Employer;
which Confidential Information only was and will be disclosed to Executive in
and under a relationship of trust and confidence under restrictions of
confidentiality. As used in this Agreement, Confidential Information includes,
without limitation: (i) names, addresses, phone numbers, dates and any and all
other information regarding the clients or potential clients, customers and key
contacts at customers of Employer; and (ii) trade secrets, business, sales and
financial data, pricing, costs, financial statements, programs, property, lists,
diagrams and drawings, information concerning the design, components and
manufacture of Employer's products, market information, financial and marketing
plans, manuals, strategies, and projections of Employer. Executive agrees that
the Confidential Information is a trade secret for purposes of all applicable
laws, and that Confidential Information would not be disclosed to Executive but
for Executive's execution of this Agreement.
(b) Except as required by the duties of Executive's employment with
Employer, Executive shall never during his employment or for a period of three
(3) years after such employment terminates, directly or indirectly, use,
publish, or otherwise disclose any Confidential Information, without Employer's
prior written consent. This restriction shall not apply to information which is
known in the industry generally other than by reason of any actions of
Executive.
(c) During Executive's employment with Employer, Executive shall
exercise all due and diligent precautions to protect the integrity of the
Confidential Information, and upon termination of employment, or otherwise
before then upon request, Executive shall return to
<PAGE> 7
Employer all documents or materials embodying such Confidential Information or
any part thereof (including any copies thereof) in Executive's possession or
control.
8. Restrictive Covenants.
(a) Executive acknowledges and agrees that Employer will suffer
great loss and damage if, during Executive's employment or at any time
subsequent to such employment, Executive were to improperly use or disclose
Confidential Information or goodwill of Employer, or if Executive were to use
Executive's contacts and relationships with any client, potential client,
customer, or referral source of Employer, and therefore agrees that Executive
must comply with the restrictive covenants hereinafter set forth; it being
understood at the execution of this Agreement that the parties acknowledge and
agree such restrictions protect legitimate protectable interests of Employer,
with respect to its trade secrets, customers, and referral sources, are
reasonable and necessary to protect such interests, are compatible with their
respective rights, and do not impair or prevent Executive from earning a living.
(b) During Executive's employment with Employer and for the
continuous period of one (1) year after such employment terminates (whether the
Term or any extension thereof expires, the employment term is non-renewed by
either party, or employment is terminated by Executive or Employer and
regardless of the reason for termination), Executive shall not directly or
indirectly, for any reason or purpose whatsoever (other than on Employer's
behalf in performing Executive's required duties for Employer), whether for
Executive's own benefit, or for the benefit or on behalf of, or in conjunction
with, any other corporation, partnership, proprietorship, or other form of
business entity, and whether as an employee (in any executive, managerial,
officer, exempt or sales position), partner, principal, officer, director,
consultant, agent, stockholder or otherwise:
(i) contact, call on, solicit the business of, sell any
goods or services of a type then provided by Employer
to, or attempt to take away from Employer, any client or
customer of the Employer or any business of such
customer of a type then provided by Employer to such
customer;
(ii) engage in any manner (or own any interest) in any
part of a business then engaged in by Employer,
anywhere within any metropolitan area of the
continental United States or any other country where
Employer then is marketing and/or selling its goods
or services (the mere ownership of less than two
percent (2%) of the shares of any publicly traded
corporation shall not be considered a violation of
this provision); or
(iii) solicit or encourage any director, officer, or other
employee of Employer to discontinue that individual's
status or employment with Employer or such individual to
engage or participate in any activity or employment in
competition with Employer.
<PAGE> 8
(c) It is the intention of the parties to restrict Executive's
activities only to the extent necessary for the protection of Employer's
legitimate business interests. To the extent that any covenant set forth in this
Section 8, or in Section 7 of this Agreement, shall be determined to be invalid
or unenforceable in any respect or to any extent, the covenant shall not be
rendered invalid, but instead shall be automatically amended for such lesser
term or to such lesser extent, or in such other degree, as may grant the
Employer or other party seeking enforcement the maximum protection and
restrictions on Executive's activities permitted by applicable law in such
circumstances.
(d) Executive acknowledges and agrees that (i) the separate and
distinct promises in this Agreement are reasonable and necessary in order to
protect the legitimate business interests described above, (ii) any violation
would result in irreparable injury to Employer, and (iii) the enforcement of a
remedy by way of injunction or otherwise would not prevent Executive from
earning a living.
9. Non-Waiver of Covenants. Employer's failure to exercise any of its
rights to enforce the provisions of this Agreement shall not be affected by the
existence or non-existence of any other similar agreement for any other person
employed by Employer, or by Employer's failure to exercise any of its rights
under this agreement or any other similar agreement. Employer's failure to
exercise any of its rights in the event Executive breaches any promise in this
Agreement shall not be construed as a waiver of such breach or prevent Employer
from later enforcing strict compliance with any and all promises, obligations,
and rights set forth in this Agreement.
10. Assignment, Entire Agreement, Amendment. This Agreement may be
assigned only by Employer, and is freely assignable by Employer. It constitutes
the entire agreement between the parties concerning the subject matter of this
Agreement and supersedes all prior understandings, communications and agreements
concerning such subject matter. Neither this Agreement, nor any of its terms,
can be changed, added to, waived or supplemented except in a written document
signed by Executive and Employer, except that Employer may adopt or change any
vacation, benefit, rules or other policy generally applicable to employees or a
group or class of employees in its discretion (excluding any change in the
incentive stock option plan which violates the terms of this Agreement).
11. Notification. In order to preserve Employer's rights under this
Agreement, Employer is authorized to advise any third party with whom Executive
may become employed or enter into any business or contractual relationship with,
or whom Executive may contact for any such purpose, of the existence of this
Agreement and its terms, and Employer shall not be liable for doing so.
Executive represents and agrees that Executive has not provided, and will
not provide to Employer (or utilize in connection with the performance of his
duties), any trade secrets of a prior employer.
<PAGE> 9
12. Governing Law, Assignment, Arbitration, Miscellaneous.
(a) This Agreement shall be governed by and construed and
interpreted according to the internal laws of the Commonwealth of Virginia
without reference to conflicts of law principles. The headings of the sections
are inserted for convenience of reference only and shall not be considered to
constitute a part of this Agreement nor to affect the meaning.
(b) If any one or more provisions contained in this Agreement, or in
the application thereof, shall be held to be invalid, illegal, or unenforceable
in any respect, the validity, legality and enforceability of the remaining
provisions of this Agreement shall not in any way be affected or impaired.
Nothing in this Agreement shall be deemed to require Employer or Executive to
take any action or perform any obligation which would be contrary to or
inconsistent with a Court order.
(c) Employer represents and agrees that the execution, delivery and
performance of this Agreement do not conflict with or violate Employer's
articles, by-laws or resolutions, or any judgment, order or agreement to which
Employer is a party or may be bound, and that all corporate action necessary to
authorize the Employer's execution and delivery of this Agreement has been
taken.
(d) In any suit to enforce this Agreement, venue and jurisdiction is
proper in the County in Virginia in which Herndon, Virginia (or Employer's
corporate offices, if in a different county) is located, and (if federal
jurisdiction exists) the federal district court for the district in which
Herndon, Virginia (or Employer's corporate offices, if in a different county) is
located, and the parties waive any objection to jurisdiction and venue in any
such forum and any claim that such forum is not the most convenient forum.
13. (a) In consideration of Employee's employment by Employer, and the
wages and benefits to be paid to Employee, Employee agrees that any and all
claims, disputes, and disagreements relating to his employment with or
termination of employment from Employer or any of its affiliates shall be
submitted to binding arbitration in accordance with rules of the America
Arbitration Association, and that this is the sole, exclusive, and final means
for resolution of any claims. Employer understands and agrees that any dispute
arbitrated will be heard solely by an arbitrator, and not by a court, and that
he is waiving his right to trial by jury and agrees that no demand, request, or
motion will be made for trial by jury. Employee further agrees that this
agreement to arbitrate any employment-related claim, dispute, or disagreement is
governed by the Federal Arbitration Act, and fully enforceable. Employee's
agreement to allow all claims, disputes, and disagreements to be arbitrated
shall cover all matters directly or indirectly related to his employment with or
termination of employment by Employer or any of its affiliates; including,
without limitation, all claims involving laws against discrimination whether
brought under federal, state, or local law, any claim in tort or contract,
claims involving co-employees, claims involving wage payment or collections
matters, or any other claim under any federal, state, or local law, regulation,
or ordinance regarding employment, but excluding Worker's Compensation claims.
<PAGE> 10
(b) The arbitration requirement set forth in Section 13(a)
immediately above shall be null and void if and when a "Change of Control", as
defined in Section 4(g) of the Agreement, involving Employer is consummated.
14. Acknowledgment. By signing this Agreement, Executive and Employer
each acknowledge and agree that they each have read the Agreement, understand
and intend to fulfill each and every one of the promises in this Agreement,
understand this is a legally binding agreement, and acknowledge receiving a copy
of the Agreement.
15. Notice. Every notice, demand or other communication required or
contemplated by this Agreement shall be in writing and deemed to have been made
either when personally delivered to the respective party or deposited in the
ordinary U.S. mail, first-class postage prepaid, to the address set forth below
under such party's signature, or to such changed address as either party may
have given by written notice to the other party.
IN WITNESS WHEREOF, the parties hereto have signed this Agreement below,
as of this 15th day of November, 1999.
NET2000 COMMUNICATIONS, INC.
By: /s/ Clayton A. Thomas, Jr. Date: November 15, 1999
--------------------------------------- -----------------
Clayton Thomas, Jr.
Chief Executive Officer & Chairman
/s/ Clyde A. Heintzelman Date: November 15, 1999
- ------------------------------------------ -----------------
Clyde A. Heintzelman
Residing at:
------------------------------
------------------------------
<PAGE> 1
EXHIBIT 10.12.2
NET2000 COMMUNICATIONS, INC.
STOCK OPTION AGREEMENT
This Stock Option Agreement (the "Agreement"), effective as of
November 10, 1999, is made by and between NET2000 COMMUNICATIONS, INC., a
Delaware corporation (the "Company"), and DONALD E. CLARKE (the "Optionee").
WHEREAS, the Company wishes to grant an option to purchase shares of
the Company's common stock to the Optionee pursuant to the terms of the
Company's 1997 Equity Incentive Plan (the "Plan");
NOW, THEREFORE, in consideration of the mutual covenants herein
contained and other good and valuable consideration, receipt of which is hereby
acknowledged, the parties agree as follows:
ARTICLE I
GRANT OF OPTION
Section 1.1 - Grant of Option
In consideration of service to the Company and for other good and
valuable consideration, the Company grants to the Optionee an option to purchase
45,000 shares of the Company's common stock in accordance with the terms and
conditions of the Plan. The option is not intended by the parties to be, and
shall not be treated as, an incentive stock option, as such term is defined
under Section 422 of the Internal Revenue Code of 1986 (the "Code"). The
Optionee's rights with respect to the option shall be governed by the terms of
the Plan.
Section 1.2 - Option Price
The purchase price of the shares of stock covered by the option shall
be $4.00 per share.
Section 1.3 - Adjustments in Option
In the event that the outstanding shares of stock subject to the
option are changed into or exchanged for a different number or kind of shares of
the Company or other securities of the Company by reason of merger,
consolidation, recapitalization, reclassification, stock split, stock dividend
or combination of shares, the shares subject to the option and the price per
share will be equitably adjusted to reflect such changes pursuant to Article IX
of the Plan. Such adjustment in the option shall be made without
<PAGE> 2
change in the total price applicable to the unexercised portion of the option
(except for any change in the aggregate price resulting from rounding-off of
share quantities or prices) and with any necessary corresponding adjustment in
the option price per share. Any such adjustment made by the Administrator of the
Plan (the "Administrator" as defined in the Plan) shall be final and binding
upon the Optionee, the Company and all other interested persons.
ARTICLE II
EXERCISE OF OPTION
Section 2.1 - Person Eligible to Exercise.
During the lifetime of the Optionee, only the Optionee may exercise
the option or any portion thereof. After the death of the Optionee, any
exercisable portion of the option may, prior to the time when the option becomes
unexercisable under the terms of the Plan or the Agreement, be exercised by the
Optionee's personal representative or by any other person empowered to do so
under the Optionee's will, trust or under then applicable laws of descent and
distribution.
Section 2.2 - Manner of Exercise
The option, or any portion thereof, may be exercised only in
accordance with the terms of the Plan and solely by delivery to the President of
the Company of all of the following items prior to the time when the option or
such portion becomes unexercisable under the terms of the Plan:
(a) Notice in writing signed by the Optionee or the other
person then entitled to exercise the option or portion thereof, stating that the
option or portion thereof is thereby exercised, such notice complying with all
applicable rules (if any) established by the Administrator;
(b) Full payment (in cash or by cashiers' or certified
check) for the shares with respect to which such option or portion thereof is
exercised;
(c) A bona fide written representation and agreement, in a
form satisfactory to the Administrator, signed by the Optionee or other person
then entitled to exercise such option or portion thereof, stating that the
shares of stock are being acquired for his or her own account, for investment
and without any present intention of distributing or reselling said shares, or
any of them, except as may be permitted under the Securities Act of 1933, as
amended (the "Act"), and then applicable rules and regulations thereunder, and
that the Optionee or other person then entitled to exercise such option or
portion will indemnify the Company against and hold it free and harmless from
any loss, damage, expense or liability resulting to the Company if any sale or
distribution of the shares by such person is contrary to the representation and
agreement referred to above.
- 2 -
<PAGE> 3
The Administrator may, in its absolute discretion, take whatever additional
actions it deems appropriate to ensure the observance and performance of such
representations and agreement and to effect compliance with all federal and
state securities laws or regulations. Without limiting the generality of the
foregoing, the Administrator may require an opinion of counsel acceptable to it
to the effect that any subsequent transfer of shares acquired on an option
exercise does not violate the Act and may issue stop-transfer orders covering
such shares. The written representations and agreement referred to in the first
sentence of this subsection (c), however, shall not be required if the shares to
be issued pursuant to such exercise have been registered under the Act, and such
registration is then effective in respect of such shares; and
(d) In the event the option or any portion thereof shall be
exercised pursuant to Section 2.1 by any person or persons other than the
Optionee, appropriate proof, reasonably satisfactory to the Administrator, of
the right of such person or persons to exercise the option.
Section 2.3 - Conditions to Issuance of Shares
(a) The Company shall not issue any shares to the Optionee
until the Optionee has executed and delivered to the Company a Stock Restriction
Agreement substantially in the form of attached Exhibit 1, and a Notice of
Exercise of Stock Option letter, substantially in the form of attached Exhibit
2.
(b) The shares of stock deliverable upon the exercise of
the option, or any portion thereof, may be either previously authorized but
unissued shares or issued shares which have been reacquired by the Company. Such
shares shall be fully paid and nonassessable and certificates representing such
shares shall be delivered to Optionee immediately upon full compliance with the
terms and conditions contained in this Agreement and the Plan.
Section 2.4 - Rights of Shareholders
The Optionee shall not be, nor have any of the rights or privileges
of, a shareholder of the Company in respect of any shares purchasable upon the
exercise of any part of the option unless and until certificates representing
such shares shall have been issued by the Company to the Optionee.
- 3 -
<PAGE> 4
Section 2.5 - Vesting and Exercisability.
The option granted hereunder shall vest according to the schedule in
this Section 2.5 and shall be exercisable as to not more than the vested
percentage of the shares subject to the option at any point in time. The option
shall become vested according to the following schedule:
<TABLE>
<CAPTION>
Cumulative Percentage
Date of Shares Vested
---- ----------------
<S> <C>
Immediately 25%
1-36 1/36th of remaining 75%
per month
</TABLE>
Section 2.6 - Duration of Option
Except as specified below, the option granted hereunder shall expire
ten years from the effective date of grant. Notwithstanding the foregoing, the
option may expire prior to ten years from the effective date of this Agreement,
in the following circumstances:
(a) In the case of the Optionee's death, the option shall
expire on the one-year anniversary of the Optionee's death.
(b) In the case of the Optionee's total and permanent
disability and resulting termination of employment with the Company, the option
shall expire on the one-year anniversary date of the Optionee's last day of
employment.
(c) If the Optionee's employment terminates by reason of
normal retirement under the Company's normal retirement policies, the option
will expire 90 days after the last day of his employment.
(d) If the Optionee ceases employment for any reason other
than death, disability or retirement (as described in the preceding paragraph),
the option shall lapse on the 30th day following the day upon which the
Optionee's employment with the Company is terminated.
(e) Notwithstanding any provisions set forth above in this
Section 2.6, if the Optionee shall (i) commit any act of material malfeasance
affecting the Company or its affiliates, (ii) breach any covenant not to compete
or any material provision of any other agreement with the Company or any
affiliate, or (iii) engage in conduct that would warrant the Optionee's
discharge for cause, any unexercised part of the option shall lapse immediately
upon the earlier of the occurrence of such event or the last day the Optionee is
employed by the Company.
- 4 -
<PAGE> 5
Section 2.7 - Change of Control
If there is a Change in Control, as defined below, 67% of the
outstanding unvested options to purchase Company capital stock held by the
Optionee shall vest immediately. Notwithstanding the preceding sentence, (i) if
the Optionee shall be terminated by the Company, without cause (as defined in
the Employment Agreement by and between the Company and the Optionee of even
date herewith, the "Employment Agreement"), within three months of a Change in
Control, as defined below, 100% of the outstanding unvested options to purchase
Company capital stock held by the Optionee shall vest at the time of termination
or (ii) if the Optionee shall be terminated by the acquiring company, without
cause (as defined in the Employment Agreement effective December 15, 1997 by and
between the Company and the Optionee), within six months following a Change in
Control, as defined below, 100% of the outstanding unvested options to purchase
Company capital stock held by the Optionee shall vest at the time of
termination.
Change of control shall be deemed to occur upon the first of the
following events:
(i) any person becomes the beneficial owner,
directly or indirectly, of the securities of the Company representing 50% or
more of the combined voting power of the Company's then outstanding voting
securities and such person has the ability to elect a majority of the members of
the Company's Board of Directors, if such ownership is not in place on the date
of the grant;
(ii) any person becomes the beneficial owner,
directly or indirectly, of the securities of the Company sufficient to elect a
majority of the members of the Board of Directors of the Company, provided that
the Optionee's responsibilities as an employee of the Company are materially
adversely diminished by such change in control; or
(iii) the sale of all or substantially all of the
assets of the Company, or a merger, consolidation, or similar transaction of the
company in which the Company is not the surviving entity or the Company's
stockholders immediately prior to such transaction hold less than 50% of the
voting securities of the surviving entity.
A "change in control" shall not include either of the following events:
(i) a transaction, the sole purpose of which is
to change the state of the Company's incorporation; or
- 5 -
<PAGE> 6
(ii) a transaction, the result of which is to
sell all or substantially all of the assets of the Company to another entity (
the "surviving entity"); provided the surviving entity is owned directly or
indirectly by the Company's stockholders immediately following such transaction
in substantially the same proportions as their ownership of the Company's voting
capital stock immediately preceding such transaction.
ARTICLE III
MISCELLANEOUS
Section 3.1 - Administration
The Administrator shall have the power to interpret this Agreement
and to adopt such rules for the administration, interpretation and application
of the Agreement as are consistent herewith and to interpret or revoke any such
rules. All actions taken and all interpretations and determinations made by the
Administrator in good faith shall be final and binding upon the Optionee, the
Company and all other interested persons. No member of the Administrator shall
be personally liable for any action, determination or interpretation made in
good faith with respect to this Agreement or any similar agreement to which the
Company is a party.
Section 3.2 - Options Not Transferable
Neither the option nor any interest or right therein or part thereof
shall be subject to disposition by transfer, alienation, anticipation, pledge,
encumbrance, assignment or any other means whether such disposition is voluntary
or involuntary or by operation of law, by judgment, levy, attachment,
garnishment or any other legal or equitable proceedings (including bankruptcy)
and any attempted disposition thereof shall be null and void and of no effect;
provided, however, that this Section 3.2 shall not prevent transfers by will or
by the applicable laws of descent and distribution.
Section 3.3 - Shares to be Reserved
The Company shall at all times during the term of the option reserve
and keep available such number of shares of stock as will be sufficient to
satisfy the requirements of this Agreement.
- 6 -
<PAGE> 7
Section 3.4 - Notices
Any notice to be given under the terms of this Agreement to the
Company shall be addressed to the Company in care of its Secretary and any
notice to be given to the Optionee shall be addressed to him at the address
given beneath his signature below. By a notice given pursuant to this Section
3.4, either party may hereafter designate a different address for notices to be
given to him. Any notice which is required to be given to the Optionee shall, if
the Optionee is then deceased, be given to the Optionee's personal
representative if such representative has previously informed the Company of his
status and address by written notice under this Section. Any notice shall have
been deemed duly given when enclosed in a properly sealed envelope addressed as
aforesaid, deposited (with postage prepaid) in a United States postal
receptacle.
Section 3.5 - Titles
Titles are provided herein for convenience only and are not to serve
as a basis for interpretation or construction of this Agreement.
Section 3.6 - Notification of Disposition
The Optionee shall give prompt notice to the Company of any
disposition or other transfer of any shares of stock acquired under this
Agreement if such disposition or transfer is made within two (2) years from the
date of the exercise of an option with respect to such shares. Such notice shall
specify the date of such disposition or other transfer and the amount realized,
in cash, other property, assumption of indebtedness or other consideration, by
the Optionee in such disposition or other transfer.
- 7 -
<PAGE> 8
IN WITNESS WHEREOF, this Agreement has been executed and delivered by
the parties as of the date first written above.
NET2000 COMMUNICATIONS, INC.
By: /s/ Clayton A. Thomas, Jr.
-----------------------------------
Clayton A. Thomas, Jr., President
DONALD E. CLARKE
/s/ Donald E. Clarke
--------------------------------------
1510 Judd Court
--------------------------------------
Street Address
Herndon, VA 20170
--------------------------------------
City, State and Zip Code
<PAGE> 1
EXHIBIT 10.26
January 7, 2000
Charles Thomas
Chairman and Chief Executive Officer
Net2000 Communications Services, Inc.
2180 Fox Mill Road
Herndon, VA 20171
Re: PROPOSED ACQUISITION OF CERTAIN OF THE ASSETS OF NET2000
Dear Mr. Thomas:
The purpose of this letter is to outline a proposed acquisition by Access
One Communications Corp. ("Access One") of certain of the assets of Net2000
Communications Services, Inc. ("Net2000").
1. Assets Acquired. Access One proposes to acquire a minimum of 10,000 of
the off-net access lines ("Access Lines") of Net2000 (the "Assets"). "Off-net
access lines" shall mean access lines purchased from Bell Atlantic for resale to
end users without use of any Net2000 network facilities. Notwithstanding the
foregoing, Access One has the right to reject any Access Line for any reason,
including, but not limited to, an Access Line with an outstanding balance due in
excess of 90 days; provided, however, that each such rejected item shall be
reviewed on a case by case basis and must be made in good faith so as not to
undermine the mutual intent set forth in this Letter of Intent.
2. Purchase Price.
(a) For and in consideration of the proposed acquisition of the
Assets, Access One shall pay Net2000 an amount in cash equal to $750 per
Access Line (the "Purchase Price Per Line") acquired, subject to downward
adjustment, as provided below (the "Purchase Price"). At Closing, Access
One will pay Net2000 $2 million in cash. The Purchase Price shall be
adjusted downward if the following gross margin targets are not met within
90 days from the Closing, as defined below, and Access One has entered
into interconnection agreements with Bell Atlantic that offer a resale
discount percentage that is equal to or greater than the discount
percentage currently offered to Net2000:
<PAGE> 2
<TABLE>
<CAPTION>
Gross Margin Purchase Price Per Line
------------ -----------------------
<S> <C> <C>
36% or greater $750
34% - 35.99% $650
32% - 33.99% $600
30% - 31.99% $550
29.99% or less $500
</TABLE>
Gross margin is defined as the Price to the Customer as under contract
with Net2000 less the actual cost of discountable services from Bell
Atlantic divided by the Price to Customers. for purposes of this
calculation, federal surcharges, taxes, PICC and other miscellaneous,
non-discountable charges will not apply.
In no event shall the Purchase Price Per Line be less than $500 per Access
Line. In consideration of the agreed upon Purchase Price, the balance of
the Purchase Price, as adjusted, shall be payable in the form of an
interest free Promissory Note payable over a period of three calendar
quarters from the Closing Date.
(i) Attrition. Such Promissory Note shall be reduced by the
lesser of (I) ten (10%) percent of the Purchase Price or (II) the
product of the Purchase Price Per Line times the total number of
Access Lines terminated during the ninety (90) day period
immediately following the Closing Date (the "Adjustment Period").
Notwithstanding the foregoing, any customer who pays at least one
invoice to Access One and subsequently terminates service shall not
be included in the Attrition calculation defined herein.
(b) Provided the twelve month historical collection rate is greater
than or equal to 90%, Access One will also acquire such of Net2000's
accounts receivable with respect to the Assets in consideration for the
payment to Net2000 at Closing of an amount equal to 75% of Net2000's then
outstanding accounts receivable.
(c) Access One will, at the Closing, enter into a multi-year
wholesale agreement with Net2000 allowing Access One to resell Net2000's
network based services on commercially reasonable terms.
3. Right of First Refusal. From and after the Closing, Access One shall,
for a period of two years, have a right of first refusal to acquire, on the same
terms and conditions as then offered by Net2000, any future off-net customers as
may be offered for sale by Net2000.
4. Management Agreement. In further consideration of the agreed upon
Purchase Price, the parties shall enter into a management agreement on mutually
acceptable terms and conditions, to cover the period post-Closing.
2
<PAGE> 3
5. Closing. It is contemplated that a Closing of any transaction would
take place within 90 days of this Letter of Intent. In connection with all
matters discussed herein, it is expressly agreed that all parties will timely
pursue a Closing and negotiate in good faith to achieve the objectives of this
Letter of Intent.
6. Conditions to the Proposed Acquisition.
(a) Commencing on the counter-execution hereof by Net2000 and for a
period not to exceed thirty days, Access One shall conduct and complete a
comprehensive due diligence analysis and review satisfactory to Access
One, including, but not limited to, obtaining access to and review of all
financial and operational statements and projections, contracts, books and
records, agreements, and access to any and all appropriate personnel and
vendors of the Company with knowledge of the foregoing;
(b) Negotiation and execution by the parties of an Asset Purchase
Agreement and Bill of Sale and such other agreements and documents
containing standard representations and warranties, covenants and
conditions satisfactory to the parties, including, but not limited to,
eighteen month non-compete and three year non-solicitation provisions in
Maryland and Virginia, and indemnities;
(c) Approval of the Board of Directors of each of Access One and
Net2000, and each of its respective shareholders, as and if required; and
(d) Obtaining any and all required state and/or federal regulatory
approval prior to transfer of the Assets.
7. Confidentiality. Except as required by law, neither party nor the
principals thereof shall disclose to any third party, other than on a "need to
know basis", the existence of this proposal or the terms hereof, or any other
information related to this proposal without the prior written consent of the
other party. Notwithstanding the foregoing, either party may disclose the terms
of this offer and any information relating to the transaction contemplated
herein to such party's partners, officers, directors, employees, agents,
accountants, lenders, attorneys, investment bankers, consultants and other
representatives only for the purposes of evaluating, analyzing, negotiating and
consummating any transaction pursuant to the proposal as contemplated herein.
Further, the parties hereto expressly acknowledge that the terms of this
transaction, including any definitive documents executed in connection herewith,
may be disclosed in any document publicly filed by Net2000. In the event Net2000
in any way publicizes this transaction in a presentation to third parties
utilizing any of the material terms hereof, it will seek the prior written
consent of Access One, which consent shall not be unreasonably withheld.
3
<PAGE> 4
8. Operation of the Business. Upon the Net2000 counter-execution of this
Letter of Intent, Net2000 will be required to agree not to offer any of the
Assets for sale, other than to continue to conduct its business in the ordinary
course without any material deviation in the services it renders, or otherwise
conduct discussions or negotiations with third parties other than Access One
with a view toward a disposition of all or part of such Assets.
9. Expenses.
(a) In the event the Closing does not take place within 10 days of
the Closing Date, as provided above, due to no fault of Access One,
Net2000 shall owe Access One its reasonable and documentable expenses in
an amount not to exceed $25,000.
(b) In the event the Closing does not take place within 10 days of
the Closing Date, as provided above, due to no fault of Net2000, Access
One shall owe Net2000 its reasonable and documentable expenses in an
amount not to exceed $25,000.
10. Assignment. Access One may assign all of its rights and obligations
under this Letter of Intent in its sole and absolute discretion, which assignee
must agree to abide by all of the terms and conditions contained herein. Net2000
may not assign any of its rights.
11. Governing Law. This Letter of Intent shall be interpreted in
accordance with its terms and otherwise in accordance with the laws of the State
of New York, applicable to contracts entered into and to be performed entirely
within such state, without regard to conflicts of laws.
12. Entire Agreement. This Letter of Intent constitutes the entire
agreement between the parties with respect to the subject matter hereof and
supersedes all prior agreements, understandings, representations and statements,
if any whether written or oral, with respect to the subject matter hereof. This
Letter of Intent may only be modified by a written instrument signed on behalf
of each party hereto by its respective authorized officer.
13. Counterparts. This Letter of Intent may be executed in counterparts,
each of which shall be deemed an original, but both of which shall constitute
the same instrument.
4
<PAGE> 5
If you are in agreement with the foregoing, please execute this Letter of
Intent in the space provided below and return the original to my attention.
Very truly yours,
ACCESS ONE COMMUNICATIONS CORP.
By: /s/ Kenneth Baritz
-----------------------
Name: Kenneth Baritz
Title: Chairman and CEO
Agreed to and Accepted
this 7th day of January, 2000
Net2000, Inc.
By: /s/ Clayton A. Thomas, Jr.
- -----------------------------
Name: C. A. Thomas, Jr.
Title: CEO
5
<PAGE> 1
Exhibit 23. 1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated November 19, 1999, except for Note 13, as to which the
date is January 12, 2000, in the amendment No. 1 to the Registration Statement
(Form S-1 No. 333-91987) and related Prospectus of Net2000 Communications, Inc.
dated January 13, 2000.
/s/ Ernst & Young LLP
McLean, Virginia
January 13, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NET2000
COMMUNICATIONS, INC. FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED SEPTEMBER
30, 1999
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 15,007,081
<SECURITIES> 0
<RECEIVABLES> 7,136,601
<ALLOWANCES> (1,660,000)
<INVENTORY> 0
<CURRENT-ASSETS> 21,222,350
<PP&E> 52,580,898
<DEPRECIATION> (2,957,437)
<TOTAL-ASSETS> 74,101,758
<CURRENT-LIABILITIES> 17,467,086
<BONDS> 0
0
75,180,969
<COMMON> 101,153
<OTHER-SE> (53,396,675)
<TOTAL-LIABILITY-AND-EQUITY> 74,101,758
<SALES> 18,669,796
<TOTAL-REVENUES> 18,669,796
<CGS> 0
<TOTAL-COSTS> 15,497,597
<OTHER-EXPENSES> 28,204,165
<LOSS-PROVISION> 440,488
<INTEREST-EXPENSE> 1,051,812
<INCOME-PRETAX> (22,033,388)
<INCOME-TAX> 0
<INCOME-CONTINUING> (22,033,388)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (22,033,388)
<EPS-BASIC> (3.74)
<EPS-DILUTED> (3.74)
</TABLE>
